Time after time we repeatedly hear politicians pompously announcing a rise in GDP figures. They show us an escalating digit or a graph with increasingly larger bars and nod our heads in acknowledgement that they have indubitably conducted a good deed for us all.
But have we ever really understood what GDP really means? How it is measured? And if a rise in GDP always reflects an improvement in people’s standard of living?
GDP; meaning Gross Domestic Product, is the final value of goods and services produced in a country over a specified period of time. Although it does have its limitations, GDP is the most widely used measure of economic activity and serves as a good indicator of the economic health of a country. Since the method of calculating GDP is standardised and does not vary between countries, GDP is also used for cross-country comparisons. GDP is calculated in real terms, this simply means that inflation (the general rise in prices) is accounted for. If the country’s nominal value of GDP increases only as result of a surge in prices, this does not reflect economic growth.
So is the measure of GDP a good indicator of the overall level of welfare within a country?
The answer is not so simple that it can be answered with a simple yes or no.
Economic welfare refers to the level of prosperity and quality of living standards in an economy. This can be measured through a variety of different factors; these include GDP, literacy, levels of pollution, education, healthcare, employment prospects and several others.
When coming across the subject of GDP, the phrase ‘GDP per capita’ is not a new one. ‘GDP per capita’ simply means that the country’s Gross Domestic Product is divided by its total population; hence seemingly calculating the average GDP of every person. However, GDP per capita is not a measure of personal income and it does not take into consideration income distribution in a country. So, when observing a rise in GDP per capita, ask yourself whether this does indeed benefit everyone… and you often find the answer to be somewhat disappointing. It is generally assumed that among countries with similar GDP levels, the ones with more equal income distribution will tend to have a better standard of living for most people. It must be emphasized once again that by simply dividing GDP by the total number of inhabitants of the given country, you fail to capture the effects of inequality.
Another limitation experienced in using GDP to calculate the overall welfare of a country is that it assumes that all growth is good growth. For example, savings from energy-efficient devices count as negative for GDP growth, even though it is certainly positive for society. If a factory polluted the sea, the clean-up is added to GDP, but undoubtedly the fact that the sea needed a clean-up was a problem to begin with. In GDP measures, rising crime levels can boost GDP as citizens attempt to protect themselves by adding security and alarms to protect their property.
Yet another limiting factor is that GDP completely ignores all activities and services that have no price attached to them. Functions performed by the family, community and volunteers such as childcare and housework are not added in GDP figures. It is only when we no longer have time to perform such essential functions and must pay for the service to be done for us that GDP is increased.
It is important to realise that bigger is not always better. According to Eurostat and the NSO, GDP in Malta has grown at a very fast rate since 2013, faster than that of most EU member states. However is this growth being translated into a better quality of life? Perhaps this argument could highlight everyday experiences of citizens; large number of unacceptable roads, traffic congestion, overdevelopment, environmental degradation, pollution and so forth.
All of the problems mentioned above are quite well-recognised. In fact, the European Commission has started an initiative called ‘Beyond GDP’ that is based on the fundamental idea of developing indicators that are as clear and appealing as GDP whilst being more inclusive of environmental and social aspects of progress. In today’s world we are becoming more and more aware of current environmental issues and it is important that we do not see these as a hindrance or rather as a moral obstruction to economic growth; slowing our growth to accustom to environmental changes. Rather we should find a way to incorporate the consideration of such issues in our decision making; be it an economical or socio-political one, as directly or indirectly these decisions will indubitably affect our surrounding environment.
To conclude I would like to state that these ideas are not an attempt to discredit economists who developed or rely on GDP as the basis of their analytical research and such. GDP can still be considered as a good measure of economic growth. However, we must realise that it does have several limitations. We must look beyond the figures themselves. We must not be fooled into thinking that every increase in GDP will benefit us or that they are even favourable to start with. Ask yourself how GDP is actually affecting you; or if it affects you at all! Analyse and interpret the figures yourself; observation goes a long way. Keep an open mind and see for yourself what has actually caused the increase in figures… politicians may lie, but numbers never do!
Written by: Francesca Grillo