GDP and its limitations in assessing well-being

A set of practice flashcards covering GDP's purpose, its limitations, nonmonetary factors, distributional concerns, and alternative indicators used to gauge overall well-being.

What does GDP primarily measure?

Economic activity and material wealth, including production and consumption that involve prices.

What important aspects of life does GDP fail to capture?

Overall well-being, happiness, social progress, distribution of gains, mental health, social capital, and nonmonetary progress.

Why might a low GDP person not be worse off than a high GDP person?

They may have more free time, less traffic, closer proximity to work, and lower expenses.

What types of labor are excluded from GDP because they lack a price?

Domestic labor, parenting, and volunteer work.

How can GDP increase while welfare declines due to nonmonetary costs?

The broken windows effect: damage or destruction boosts GDP through repairs, even though welfare is unchanged or worse.

What is an in-kind exchange and how does GDP treat it?

Non-monetary trades (barter) like services exchanged without money; GDP ignores them.

What is the underground economy and its effect on GDP?

Illegal activities (drugs, sex, arms) aren’t counted in GDP; including them would raise GDP estimates by about 5–10%.

Explain the distribution problem in GDP.

GDP growth can disproportionately benefit the rich, while many groups see little improvement; growth is not evenly shared.

What is the 'speedometer' analogy for GDP?

GDP is like a car speedometer: it shows speed but not other crucial dials like fuel, miles, oil, or gear.

What does the phrase 'GDP excludes nonmonetary progress' mean?

GDP ignores improvements in happiness, mental health, social cohesion, and other nonpriced benefits.

What does the 'broken windows problem' illustrate about GDP?

GDP counts reconstruction costs as activity, but the overall welfare impact may be negative.

How does GDP relate to environmental costs and quality of life?

GDP does not directly capture environmental quality or health outcomes; growth can occur with environmental degradation.

What is the effect of longer work hours on GDP and life satisfaction?

Longer hours can raise GDP but reduce leisure time and overall well-being.

How does GDP relate to inequality and the distribution of gains?

GDP doesn’t indicate who benefits; growth often concentrates gains at the top.

What are 'in-kind exchanges' and why are they significant for GDP?

Non-monetary value exchanges (e.g., tutoring for services) add value but are not counted in GDP.

What is the significance of the 'underground economy' in GDP analysis?

It includes illegal activities; excluding them underestimates total economic activity.

What kinds of non-economic indicators are used to assess national progress?

Child mortality, youth mental health, environment, social capital, trust, inequality, housing affordability, work-life balance, etc.

What is the purpose of national progress indicators or reports?

To complement GDP by tracking well-being, health, social and environmental factors beyond economic activity.

What is the overall takeaway about GDP from the notes?

GDP is good for measuring economic activity, but it is incomplete for assessing well-being and social progress; additional indicators are needed.