Sunday, September 7, 2008

GDP and living standards

It's Sunday evening. I'm back from visiting the GAIA Center for Environmental Research and Education in Kifisia which is absolutely excellent and highly recommended. After enjoying a nice meal, what's better than checking out recent back issues of the IHT or the Economist? Actually, I can think of quite a few other activities that would rank higher up but... :-)

I did find this: Economists look to expand GDP to count 'quality of life'. It is well written and it explains the limitations of using GDP as a measure of overall well-being.
Print it out and read it. Most of the problems we mention in class are there, the most important being that GDP provides no information about the underlying income distribution and how it changes. Quoting from the article:
The U.S. gross domestic product grew robustly in the post-World War II years. Family incomes also went up, and a rising GDP came to signal well-being as well as expanding economic activity. But these days, while the value added in making cars goes into the total, same as always, the gain can be distributed in stock dividends or profits or multimillion-dollar chief executive pay more than in raises for workers. The GDP does not reflect the shift in distribution.

And over the past 15 years there has been just such a shift. While the GDP has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased.
BTW, a very interesting account of how and why income distribution has become more unequal in the United States can be found in Paul Krugman's new book The Conscience of a Liberal.

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