Going Beyond the GDP

Adjusting the Economic Models to the Real World

In the contemporary world, GDP enjoys a godlike status among indexes. It is widely regarded as the most important economic index in the world, and it can offer us a great glimpse into the functioning of the domestic and international economy. The increase in GDP is communicating to us that the economy has produced more products and services each year. The law of diminishing value shows us that having more doesn’t always imply that we are doing better. Ultimately, how many “bananas” do we really want to, can, and should eat at a given time?

In this post, I will analyze some of the metrics that economists use to evaluate economies, to see if they can address some of the challenges that we face globally. Additionally, I will offer potential metrics that can help us better navigate the challenges that we are facing.

Photo by Alexander Grey on Unsplash

Like any index and model, GDP is incomplete and can often tell a false narrative. An increase in GDP is by almost all standards a good thing. It signals to us that there is an increase in economic activity, which is regarded by economists as a signal that the entire population of the country is doing better. However, GDP can rise because of negative events, such as wars and natural disasters. In the case of a natural disaster, both the state and its citizens increase their spending to address the damage that has occurred, which in turn raises the GDP. This rise in the overall GDP can seem like a good thing, when in fact it isn’t.

An additional problem of the GDP is the fact that it favors countries with large populations. If we map the GDP per capita, we get a completely different story. In that map, smaller countries may stand out more than they used to, whereas bigger ones may fall a lot down the list. We can also break down GDP into subnational units, thereby creating a map of “GDP density”. Such maps can show us that the biggest differences are not between rich and poor countries, but between urban and rural areas.

These inconsistencies push us to contemplate how we can complement the GDP as an index so that we can better understand what is happening in the economy and ultimately make better policy decisions.

Even though low GDP per capita is unquestionably linked to poor living standards, people in many countries can experience a high quality of life, despite the small size and vibrancy of the overall economy. This can lead us to conclude that the GDP can’t adequately capture the quality of life. One such statistic that measures the quality of life is the Human Development Index (HDI), which combines life expectancy, education, and income to get a fuller picture. However, some countries of equal overall poverty have different HDI statistics, which is partly attributed to public service expenditures, such as schools and hospitals.

Another key aspect in mapping the quality of life beyond the GDP can be achieved by examining the quality of institutions, especially the level of transparency of corruption. Transparency of institutions refers to the degree of openness in revealing where funds are allocated and the regulations governing such transactions. In systems with low transparency, corruption flourishes as officials operate covertly, often disregarding rules regulating resource distribution. One very important metric that can offer us a clearer view of the economy is the Corruption Perception Index (CPI).  There is some correlation between the CPI and HDI, as countries with high levels of HDI have varying levels of CPI, whereas countries with low levels of HDI consistently perform poorly in terms of corruption. 

Economics ultimately tries to resolve one problem- to satisfy unlimited wants with limited resources. In other words, Economics looks for a way in which it can most efficiently use the limited available resources. Although we tended to focus on the “efficiently” and “limited resources” part of that sentence, have we ever really stopped to wonder what we really want? Should we maybe ask a better question: What do we NEED as individuals, as societies, and as a species?

Psychologist Abraham Maslow states that humans are motivated by their needs, which progress and move from one level to another. He has identified in his pyramid different levels of needs that we need to fulfill as humans to be satisfied: physiological needs, security and safety needs, social needs, and self-actualization needs.

The state should and can play a prominent role in identifying these needs on societal levels, and in the most efficient way, in addressing them for the maximum result. The establishment of a World Happiness Report is a move in a good direction and one which can offer us a better understanding to help policymakers better steer the economies in the future. This report encompasses many of the indexes that were already mentioned in the text, however, happiness is a superficial perception of our individual and societal well-being.

In a world where conflicts are on the rise, and the global population is fighting with staggering levels of depression, we need indexes that can offer us a better understanding of how we can utilize our resources for the maximum benefit.

The current outlook necessitates further development and utilization of one or multiple indexes that can indicate the level of life satisfaction and the meaning of life. We should differentiate these two concepts since we can have meaning in life and focus on the “bigger picture” but be completely miserable in our current position, or be satisfied with our current condition yet be completely clueless as to where we wish to go. Such indexes can give us signals of how well we are performing as societies and whether we are headed in the right direction; most importantly, the establishment and further development of such indexes would put the well-being of societies and individuals at the center of our economic activity.

How we examine the economy tells us a lot about how we run the economy, and by introducing such indexes, economists will start to adapt their models to the world and the needs of societies, rather than adjusting the world to their models.