Measuring economic progress: Change is overdue

Why GDP fails as a measure of well-being

By MARK THOMA, MONEYWATCH, CBS News

How should we measure changes in an economy's standard of living, or compare living standards across countries? Typically, economists use GDP per capita as a proxy for a country's standard of living, but as International Monetary Fund head Christine Lagarde, Nobel prize-winning economist Joseph Stiglitz and MIT professor Erik Brynjolfsson noted at the recently concluded World Economic Forum in Davos, Switzerland, "GDP is a poor way of assessing the health of our economies and we urgently need to find a new measure."

Using GDP as a measure of welfare has well-known problems, which are among the first things macroeconomics principles courses cover. But the point of the discussions at Davos is that in the digital age, those problems are even deeper. Standard GDP statistics miss many of technology's benefits, so we need to rethink how we measure the typical person's well-being.

The textbooks generally point out five problems with using GDP as a measure of well-being:

• GDP counts "bads" as well as "goods".…
• GDP makes no adjustment for leisure time.…
• GDP only counts goods that pass through official, organized markets, so it misses home production and black market activity.…
• GDP doesn't adjust for the distribution of goods.…
• GDP isn't adjusted for pollution costs.…

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