Problems with GDP

  1. illegal or underground - market transactions are omitted from the GDP

   

  1. underground transactions are especially significant in countries with higher levels of corruption and taxes
  2. the informal sector in Latin American is estimated at 41% of officially measured GDP
  3. in the US or western Europe, the underground economy is likely 10%-20% of GDP
    1. GDP doesn’t count non-priced production when valuable goods and services are produced, but no monetary payment is made

   

  1. ex: doing housework, watching cat videos, volunteering
  2. this introduces two biases (measurement errors) into GDP statistics: biases over time and biases across nations

       1. as more women in the US entered the workforce, housework shifted from unpaid to paid 2. women’s participation in the workforce varies across countries, underestimating the proportion of work included in GDP

  1. GDP adds up the value of finished goods and services, but doesn’t subtract the value of bads:

   

  1. pollution, changing supplies of natural resources, loss of animal or plant species, crime
  2. “green accounting” attempts to cover the environment more explicitly
  3. environmental amenities are difficult to value
    1. GDP doesn’t account the health of nations

   

  1. to allocate resources, we must put numbers on value of health
  2. between 2007 and 2014, life expectancy increased in US by about 1 year
  3. economists have estimated that people value an additional year of life at about $150,000
  4. an extra year of life valued at $150,000 for 300 million people is worth $45 trillion
    1. GDP doesn’t measure income distribution

   

  1. doesn’t directly count for leisure, environmental quality, levels of health and education, activities conducted outside of the market, and changes in inequality of income or increases in technology
    1. many key goods are not measured in the GDP because they don’t require transactions

   

  1. it actually includes pollution, crime, the health costs of cigarettes and environmental disasters as growth because they generate spending

8 Ways of Measuring Economic Health to Replace GDP

  1. human development index
  2. genuine progress indicator
  3. thriving places index
  4. green GDP
  5. better life index
  6. inclusive wealth index
  7. genuine savings indicator
  8. happy planet index