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In Defense of GDP

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.)