Is GDP really a good indicator of the social well-being of a country and its people?

By Delon Chai Wei How

The association of social welfare with the growth of a country’s Gross Domestic Product (GDP) has always been a controversial topic and often a bone of contention amongst researchers, academics, economists, politicians and government policymakers.

While it is undeniable that GDP measures well-being derived from a country’s ability to produce goods and services, and has been a dominant economic indicator for over half a century now, there remains many issues surrounding the components of real GDP calculation, particularly whether real GDP adequately captures the social welfare and human progress in a particular country.

This article explains the main reasons why GDP alone is not sufficient as an indicator of the well-being of a country, just like wealth alone cannot be equated with one’s happiness.

In the context of economic growth, it has always been argued whether the GDP of a particular country can be implicitly or even explicitly associated with a higher standard of living among the people and thus a contributing factor to the economic and social well-being of a country and its citizens.

Currently, GDP is the most widely used measure of a nation’s economic performance over and above the other economic indicators such as Gross National Product (GNP). Within this context, it is often widely acknowledged that the standard of living is generally higher in the wealthier countries of the world.

Government policymakers have always placed great emphasis on the real GDP of a country, often rationalising that the higher the GDP achieved, the better the welfare of the country’s citizens. Economists often use GDP and other related measures to determine whether the economy is on the road to recovery, in recession, or at its worst, in the depression stage. Whenever the GDP for a particular country is in steep decline, the country’s leaders will likely face the ire of the people. So, it seems that GDP is and has always been a very valuable measure of the health of an economy.

However, it is still not a perfect measure as it is not proven that a country’s wealth can improve the standard of living or the happiness of the people in the long-term. There are concerns that GDP may be giving us a false impression of a nation’s material well-being.

Thus, it is crucial to investigate other variables that affect human progress in order to get a true and more holistic picture of a nation’s overall well-being. Whether any increase in real GDP is making a country’s people better off is definitely not clear-cut and must be determined on a case-to-case basis.

GDP is defined as the market value of final goods and services produced in a country during a given period of time. Why then is GDP not a perfect measure of well-being?

Firstly, GDP excludes non-market transactions due to practicality concerns and these values are usually not measurable in monetary terms. These include but are not limited to do-it-yourself activities like home cooking, childcare at home by parents, family-based elder care and volunteerism works, which contribute to well-being but are not reflected in GDP.

It also excludes the value of goods and services produced in the agricultural sector in poor countries where food is distributed amongst family and friends instead of distribution through the markets.

Also, many things that are beneficial to one’s life are omitted in GDP. An obvious one is leisure. A weekend supposedly meant for leisure but spent in the factory or office will certainly boost the country’s GDP but would not necessarily translate to a happy nation.

Environmental sustainability is also ignored in GDP. All economic activities, irrespective of whether it is polluting or a waste of natural resources, are considered positive from the GDP perspective. The GDP of a nation would likely reflect increases in the production of factories but not take into account the pollution they inflict on the environment. In the aftermath, billions might be spent on cleaning up works, yet the GDP for the country will continue to give a false impression of having increased greatly for that year.

Finally, GDP also turns a blind eye to the distribution of income. A RM20,000 income earned by 10 residents versus the same amount being earned by a single resident is viewed as being the same from the GDP point of view. Hence, the wealth of the people in a country may have grown disproportionately for those in the top strata of society, while those at the bottom continue to languish in poverty, contributing to a significant income gap.

GDP is also a quantitative, rather than a qualitative measure, of goods and services produced. The difference in quality between a vehicle purchased today with one purchased decades ago would probably not be reflected in GDP.

We can conclude that GDP is a good measure of economic well-being most of the time, but at the same time, it is crucial to re-consider some of the aspects GDP includes, as well as crucial aspects that it leaves out. Due consideration must still be given to aspects such as distribution of income, the kind of goods produced, quality of life, and sustainability of the environment, to name a few.

One cannot simply conclude that growth in GDP is proof of societal well-being. Even the ‘Father of Economics’ Noble Laureate Simon Kuznets, once said, “The welfare of a nation can scarcely be inferred from a measure of national income. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between short and long run. Goals for more growth should specify more growth of what and for what.”

Delon Chai is Head of Department and lecturer in the Department of Foundation Studies at Curtin Malaysia’s Faculty of Business. He holds a Master’s degree in Business Administration specialising in Finance and prior to that, he did a Bachelor’s degree in Accounting and Finance. He has had 7 years of teaching experience in higher education and prior to joining academia, he was attached to several local conglomerates in the field of corporate finance and administration. He is a member of the Malaysian Institute of Management. Chai’s latest research interest lies in using blended learning models in higher education learning and teaching and he is currently implementing the model in his classroom. He has won several students’ choice awards related to teaching at university and faculty level. He can be contacted at delon.chai@curtin.edu.my.