GDP: An Imperfect Measure of Progress

January 31, 2013 | | Bloomberg View |

Which is better for a country’s well-being: $10 million spent constructing a jail, or $10 million spent producing a line of smartphones? How about clear- cutting rain forests to produce $10 million in lumber? Or a storm that requires $10 million in repairs?

Using today’s most common shorthand of national welfare, gross domestic product, all of the above are equal. GDP measures only output, and makes no claims on the quality of that output, let alone on subjective concepts such as social progress or human happiness. It does what it was intended to do -- offer a value of marketed goods and services produced in a country in a given time frame -- and does it reasonably well.

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Third, because GDP measures average income, it can obscure important discrepancies at the household level. When incomes rise disproportionately for the well-to-do, for instance, mean income can increase even though many regular workers see their paychecks cut. As a report from the think tank Demos recently noted, although U.S. GDP more than doubled over the past 30 years, median household income grew by only 16 percent. One possible solution, which the authors support: Create new measures of household data for disposable income to better capture families’ welfare and buying power.