Every now and then, there is a controversial debate about how a country’s prosperity can be measured correctly. The most important economic indicator is often being questioned: gross domestic product (GDP). It measures the sum of all goods and services produced within a year and thus reflects the economic performance of a country. GDP is used when reporting on the economic dynamics or prosperity of a country. Prosperity and GDP are often implicitly considered the same. Critics say that true prosperity is more than just material wealth.
The criticism is justified to a certain extent. Generations of economists have studied the meaningfulness of GDP. In fact, there are good reasons for not simply using the level of gross domestic product as an accurate indicator of people’s well-being. For example, GDP also measures actions as an increase in welfare that actually only compensate for losses in prosperity. After natural disasters (devastating storms, floods, earthquakes), reconstruction work leads to a higher GDP and thus appears to increase prosperity, even though only damaged or lost assets – such as destroyed houses – have actually been restored.
There is also the realization that happiness in life depends not only on material factors but also on other things such as security, health or an intact environment. This is particularly true in affluent societies, as those who are financially secure often strive more for goals that money can hardly buy. In poor societies, on the other hand, where people often still struggle to meet the most basic needs, material progress is much more important. And this progress is best represented by a figure such as gross domestic product.
For wealthy countries, for whom non-material values are becoming increasingly important, a whole range of supplementary indicators are already available. Governments and international organizations are attempting to measure quality of life with additional, often social indicators. For example, the OECD has developed the “Better Life Index” to determine social well-being on the basis of several topics – including education and security – and to compare them internationally. In doing so, the OECD is attempting to broaden the perspective and move away from purely economic GDP data.
There are already a number of indicators that can be used to measure prosperity and social progress. Gross domestic product is just one, albeit probably the most important indicator. There is an obvious desire to condense all of these indicators into a single figure in order to be able to directly measure how well a country is doing. But this is unlikely to succeed and it should not succeed either. Soft indicators that attempt to quantify the feelings and sentiments of the population and make them measurable are susceptible to manipulation. Mistakes in economic policy (with measurably negative consequences) can be glossed over by adding feel-good factors. In this way, politically desirable results can be achieved.
With the softer indicators, however, politicians can gain additional insights into what is important to citizens in addition to economic issues. Ultimately, at the macroeconomic level applies, what every individual knows anyway: money alone does not make people happy.
As Bergos’ Chief Economist, Dr Jörn Quitzau is responsible for economic analysis. He writes about the business cycle, growth and inflation, as well as economic and socio-political issues.