Why GDP Can’t Measure the Quality of Life
GDP is an important economic idea; it is often discussed in the media, it is seen in all kinds of textbooks, and spoken about by politicians. But what is GDP? GDP is the market value of all final goods and services produced in a country within a given time frame, and GDP per capita is GDP divided by the population to find out the value per citizen. It is calculated by finding out what households, governments, and firms spend in the market; after all, what they are buying must have been produced by someone. GDP is great to measure the aggregate value of goods and services being produced within a country and sold on the market. But although it’s is an amazing measuring device, GDP is often criticized because it only measures aggregate market activity and doesn’t measure anything that can’t be counted in terms of market prices. For example, Moore McDowell, Rodney Thom, Ivan Pastine, Robert Frank, and Ben Bernanke criticized it in Principles of Economics (3d European ed., McGraw Hill) for various reasons. In this article I plan to explain those reasons from an Austrian perspective. Here are some of the things GDP doesn’t count.
Quality of Life
GDP is not very good at measuring quality of life, because it values marketable goods and services and not factors that determine quality of life, such as safety, work-life balance, and life satisfaction of the citizens, all of which, according to the Organisation of Economic Co-operation and Development (OECD), determine the quality of life. In figure 1 below, the x axis is the GDP per capita measured in USD and the y axis is the OECD’s quality of life rank (a lower number is better).