Let’s rethink the GDP

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Since its creation, Gross Domestic Product (GDP) has been used in many practical ways. Governments use GDP to improve their monetary systems and corporations’ investment plans are largely influenced by GDP. Looking at the GDP of various developed nations has also helped less developed countries create economic development strategies. I also believe keeping track of our industries, income and goods consumed from year to year is something reasonable and worthwhile to do.

However, towards the end of the 20th century, our use of GDP became very skewed. Economists fell in love with its ability to use economic growth as a positive reflector of American welfare to politicians, media and the American public. Economic growth of any kind is a positive thing to any neoclassical economist, and after a while GDP became Americas only indicator of welfare. 

Unfortunately, since GDP measures total economic activity over a given time, it can often misrepresent “welfare” of a nation. For example the money spent on thousands of homes rebuilt after Hurricane Katrina greatly increased GDP, but in no way did Hurricane Katrina increase the welfare of people in America. In fact it greatly diminished the well being of many Americans, especially those who lived in New Orleans.

Not being able to differentiate between negative and positive economic spending is one thing, but GDP has an even bigger flaw: it cannot properly measure social welfare, happiness, leisure time, health and other things that increase the overall quality of life. These things cannot be quantitatively defined, nor can they be bought or sold on a market; absolutely excluding it from the accounting system that is GDP. These are the very things that make life worth living, not the hundred thousand dollar price tag on your new Porsche. 

GDP, Walker Stevens
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