Limitations of GDP as Welfare Indicator

GDP (and its derivatives) is a measure of economic activity, actually. Narrowly understood economic activity, one should add. However, this does not prevent economists and policy makers from making welfare comparisons across countries and across time on its basis. The argument goes as follows: GDP is a good proxy of the consumption possibilities people have, and consumption is a good proxy of well-being/welfare. Therefore, we allegedly can use GDP per capita for comparing welfare between countries and GDP growth as an indicator of social progress within a society. This may sound compelling to many and, indeed, we are used to this rhetoric from authorities and the media. But it is wrong to assume that GDP or any of its common derivatives provides a measure of social welfare, for a number of reasons. Continue reading


Is Happiness a Good Indicator of Quality of Life?

In 1972 the King of the Himalayan nation of Bhutan introduced a fairly new and unconventional concept of social and economic progress measurement – Gross National Happiness. It is a symbol and a manifestation of the ever more widespread belief that GDP and its derivatives (GNP, GDI, GNI etc.) don’t provide what was long thought they do – an imperfect but nevertheless sensible proxy for a nation’s well-being. However, this raises the question: is happiness a better measure. There are reasons to believe that it is not. Continue reading