Answer to Question #307472 in Macroeconomics for geoffroy

Question

How can one measure a country’s GDP? What are its limitations as a measure of wellbeing? Do we have any alternative measurements of „wellbeing“?

Answer 1

How can one measure a country’s GDP?

GDP is calculated by adding up the quantities of all goods and services produced, multiplying them by their prices, and then adding them all up. GDP may be calculated using either the aggregate of what is purchased or the sum of what is generated in the economy. Consumption, investment, government, exports, and imports are several types of demand.

What are its limitations as a measure of wellbeing?

• Non-market transactions are excluded.
• Failure to account for or depict the extent of economic disparity in society.
• Failure to establish whether or not the country's growth pace is sustainable
• Failure to account for the costs of negative externalities imposed on human health and the environment as a result of the nation's output production or consumption.
• Treating the replacement of depreciated capital in the same way as new capital formation

Do we have any alternative measurements of „wellbeing“?

Yes.

Different national and international organizations have devised alternative measures to offer a more comprehensive picture of a country's quality of life. These are some of them:

• The Human Development Index (HDI)
• The Genuine Progress Indicator (GPI)
• The Happy Planet Index (HPI)
• Per-capita GDP. Although growth in GDP is often associated with increased wellbeing, this is not always the case. One explanation for this is that GDP ignores the distribution of the output produced among the population. GDP per capita accounts for population increase, but it does not represent societal trends in wealth disparities.
• The rate of employment. When more individuals work to support themselves, resources in the public sector are freed up, and pressure on the public transfer system is relieved. Income disparities decrease as more individuals work. A high employment rate allows the public welfare system to be strengthened.
• Unemployment rate. Work provides a sense of belonging, as well as financial stability. The unemployment rate is the percentage of the workforce that is unemployed yet willing and able to work. Unemployment may have a substantial negative influence on one's health and well-being. Individuals who work have the ability to sustain themselves and have a greater chance of shaping their own life.