The limitations of GDP as a measure of economic well-being

Introduction

Gross Domestic Product (GDP) is often seen as the ultimate measure of an economy's success, but it has limitations in capturing the true well-being of a nation. In this article, we will explore why GDP falls short and why we need to consider other factors for a more comprehensive assessment of economic prosperity.

GDP and Quality of Life

GDP only looks at the value of money a country generates from goods and services, ignoring the well-being of its people. For example, a country with a high GDP may still have poor living conditions and unequal opportunities for its citizens.

Example 1: The United States has a large GDP, but it faces income inequality, with the wealthiest portion of the population holding a significant share of the nation's wealth. This disparity impacts the well-being of many citizens, leading to higher poverty rates and reduced access to basic necessities for those at the bottom of the income ladder. Even with highest GDP America is in debt. In 2000 (with GDP of about 10 trillion dollar) about 17 million peoples were on SNAP (food subsidy) and it increases to about 42 million in 2022 (with GDP of about 25 trillion dollars). This clearly shows, even with increase and doubling of GDP and debt of about 34 trillion dollar, more American citizens facing economic hardship with time.

Example 2: Qatar ranks among the top countries in terms of GDP per capita, but the majority of its workforce comprises migrant laborers who face challenging working conditions and limited access to social welfare benefits, impacting their overall well-being.

Environmental degradation

GDP doesn't take into account the harm caused to the environment, leading to an incomplete understanding of the real cost of economic growth.

Example 1: China's rapid economic growth has resulted in severe air pollution and ecological damage, affecting the health and well-being of its people. Although China has a high GDP, the negative environmental consequences impact citizens' quality of life and health.

Example 2: Indonesia's reliance on natural resource extraction for economic growth has led to deforestation and biodiversity loss, affecting local communities' livelihoods and overall well-being.

Happiness and well-being

GDP doesn't measure how happy or content people are, missing out on an essential aspect of a thriving society.

Example 1: Bhutan focuses on Gross National Happiness (GNH) instead of GDP, emphasizing the importance of overall well-being and sustainable development. Bhutan's unique approach prioritizes environmental conservation, cultural preservation, and equitable economic growth to ensure the happiness and well-being of its citizens.

Example 2: Despite having a high GDP, Japan faces societal challenges related to mental health and social isolation, showing that economic growth alone does not guarantee the well-being of its people.

Inequality and social indicators

GDP doesn't consider income inequality and other social indicators, offering an incomplete picture of a nation's prosperity.

Example 1: Scandinavian countries, like Norway and Sweden, have high levels of social equality and well-being despite not having the highest GDPs (Figure 1). Their strong social welfare systems and focus on education and healthcare contribute to the overall well-being of their citizens.

Figure 1. Economic empowerment promotes social well being and equality in a society.

 

Example 2: South Africa's economy has a significant GDP, but it struggles with high income inequality and persistent poverty rates, leading to socio-economic challenges that hinder the well-being of a large portion of the population.

Public health and education

GDP doesn't reflect the state of public health and education, crucial factors in determining the well-being of a population.

Example 1: Cuba's healthcare system, with limited resources but impressive outcomes, shows that GDP doesn't directly correlate with health and well-being. Cuba's focus on preventive care and public health initiatives has led to notable improvements in health outcomes despite economic constraints.

Example 2: Finland's education system, known for its excellence and equity, plays a vital role in shaping citizens' well-being and future prospects, even though it may not be adequately reflected in GDP values.

Conclusions

While GDP is useful for measuring economic activity, it doesn't give us the whole picture of a country's well-being. To understand a nation's true prosperity, we must consider a broader range of indicators, including income distribution, environmental sustainability, public health, education, and subjective well-being. By taking a more holistic approach, policymakers and economists can develop better strategies to promote genuine and sustainable progress for all citizens.