My recent Marketplace commentary focused on the recent Sarkozy Commission report, which re-examined the usefulness of the usual economic indicators, like Gross Domestic Product (or GDP).
The report raises many of the usual shortcomings of GDP. And I agree with each of their criticisms. Much of this was summarized 40 years ago, in a famous Bobby Kennedy speech:
But there’s a funny thing about GDP: despite all of these shortcomings, in practice, it still turns out to be a surprisingly useful indicator of the health of nations. Before you rush to disagree, let me be clear: this is an empirical observation, not a theoretical defense of GDP.
Here’s exhibit one, a chart I’ve discussed here before. The chart shows each country’s GDP (shown on a log scale) and it’s average level of subjective satisfaction, measured from surveys where people are asked to rate their well-being on a zero to ten scale. The correlation between the objective measure of GDP and the subjectively assessed experiences of people’s lives is greater than 0.8. That’s an astonishingly high correlation. (Related paper, here.)
In fact, the correlation is so high that it presents an interesting tension for folks like Betsey Stevenson and myself, who are working on these alternative indicators. The fact that subjective measures are correlated with objective measures adds to their credibility. But when the correlation is this high, it becomes less clear that it is so important to supplement measures of Gross Domestic Product with new measures of Gross National Happiness.
It’s not just life satisfaction that is so closely related to GDP. We’ve also analyzed data on the frequency of a range of other subjective measures, and in each case, there’s a robust correlation between log GDP per capita and the proportion of the population reporting each feeling:
Another response to Bobby Kennedy would be to build broader indices of development. The UN’s Human Development Index is one such measure, combining data on life expectancy, adult literacy, educational enrolment and GDP per capita. But again, it turns out that GDP per capita is also highly correlated with this broader index.
My full Marketplace commentary is available here, or you can listen to it here. (Oh, and if you missed Betsey’s commentary on Christmas Eve, you can catch up on that one, here.)
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What’s forgotten about this talk about the `GDP being a misleading indicator’, is that it was developed (originally as `GNP’, gross national product) in order to get a more accurate gauge on the economic health of a country.
It is alleged by its critics that `GDP is the be-all and end-all of everything’, but really, who treats it this way?
I would certainly ask if those who say that `just bec. GDP goes up by two percent’, doesn’t mean everyone is better off: if the GDP goes *down* by two percent, is this too irrelevant to people being better off?
the GDP is the best overall method of measuring economic performance, period. All other proposed measures – i.e. `Gross Domestic Happiness’ or whatever – rely on too-subjective measures and thus, are useless.
So I guess measuring the national debt load as a percentage of annual GDP is a fair way of gauging the effectiveness of policies designed to avoid runaway national debt. This leads us to what some might consider the perverse conclusion that since the end of WWII – and especially over the last 25 years – democratic administrations have been much better at keeping the national budget in line than the republican administrations. So why are the democrats constantly castigated as spendthrifts?
Ah, but correlation isn’t causation, as you well know. What about leading indicators? is there a link between GDH and future GDP growth? That relationship would result in a very similar graph (even account for the log relationship) but point to the idea that it would be much more important to maximize GDH than GDP in the long run.
Of course, GDH might equally be well linked to past economic growth, which would bolster your claims. It’d be interesting to try and get a Cross-correlogram of the two data sets, assuming you had good enough temporal resolution.
Wow. “Excitement/interest in something” is negatively correlated with log GDP. Apparently I made a good decision not going into a mainstream career…
“The UN’s Human Development Index is one such measure, combining data on life expectancy, adult literacy, educational enrolment and GDP per capita. But again, it turns out that GDP per capita is also highly correlated with this broader index.”
GDP better be highly correlated. It’s factored into the calculation.
Interesting that the correlation stated between GDP and life satisfaction is very high. But the line has a very flat slope. An increase of about 70-fold (7000%) in GDP leads to an increase of a little less than 100% in satisfaction (as measured by that index).
The Hong Kong data point in the first graph gave me a chuckle.
—
Wesley
http://wtanaka.com/
I would expect a high degree of correlation across the full spectrum of countries. ie first world country populations are more satisfied then third world. country populations. Simple levels of life expectancy, safety and living conditions ought to drive a strong correlation.
However, GDP is primarily used for domestic policy making to measure increases in “wealth” for domestic citizens. For that reason I think nations should be initially separated by economic status before looking for correlation that could be seen to be meaningful.