Beyond GDP – is it time to rethink the way we measure growth?

Beyond GDP – is it time to rethink the way we measure growth?

For decades, GDP was the measure of all things. Many economists argue that this is no longer the case.

Image: REUTERS/Thomas Peter

Written by

Ross ChaineyDigital Media Specialist, World Economic Forum


Wednesday 13 April 2016


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Is our love affair with GDP coming to an end? If you were following this year’s Annual Meeting in Davos, you’d be forgiven for thinking that this is indeed the case.

In three separate sessions, two giants of the financial world and one leading academic were all in agreement: gross domestic product – the estimate of the total value of goods and services a country produces – is up for review.

Nobel Prize winning economist Joseph Stiglitz, IMF head Christine Lagarde and MIT professor Erik Brynjolfsson all said GDP is a poor indicator of progress, and argued for a change to the way we measure economic and social development.

“We have to go back to GDP, the calculation of productivity, the value of things – in order to assess, and probably change, the way we look at the economy,” said Lagarde.

As the business landscape reinvents itself, demographics shift, inequality expands, climate change gets worse and technology continues to advance at breakneck speed, GDP is struggling to stay relevant.

In order to keep up with the changes brought on by the Fourth Industrial Revolution, many are arguing that we need to find a new measure to assess the health of our economies and – more importantly – the people living in them.

In the coming weeks, we’ll be publishing a number of articles examining the past, present and future role of GDP – and the new economic models that could replace it.

What is GDP? And more importantly, what is it not?

For decades, GDP was the measure of all things. Some countries, like China, remain obsessed with it and use it to set their own targets for growth. As the World Economic Forum’s chief economist Jennifer Blanke writes in this in-depth explainer on GDP, “the evolution of GDP remains a fixation for governments around the world and it is also a regular topic on the agenda of global and regional groupings”, such as the 2016 Spring Meetings of the IMF and World Bank.

But amid this obsession, Blanke argues, “it’s easy to forget that it was not initially intended for this purpose, it merely provides a measure of the final goods and services produced in an economy over a given period, without any attention to what is produced, how it’s produced or who is producing it.”

Put simply, focusing on GDP growth is not the way forward. She writes:

“GDP is a partial, short-term measure, whereas the world needs more wide-ranging and responsible instruments to inform the way we build the economies of the future.”

Blanke mentions three key questions that GDP overlooks: is growth fair, is it green, and is it improving our lives?

This last question is one that would resonate with Richard Easterlin, professor of economics at the University of Southern California, who has been writing about the link between happiness and income for 40 years.

We are faced with an “enticing opportunity,” he says in this essay. “To consider happiness as the leading measure of well-being, supplanting the current favourite … GDP.”

Crunch the numbers, and you’ll find that the relationship between happiness and income probably isn’t what you thought it was, he argues. In short – money isn’t everything:

“In rich countries – rich or poor, democratic or autocratic – happiness for most is success in doing things of everyday life. That might be making a living, raising a family, maintaining good health, and working in an interesting and secure job.”

The silent – unmeasured – majority

Inclusive growth, environmental outcomes and well-being are not the only missing parts of the puzzle. Another controversial – but sadly, as explored in our Women and Work series, unsurprising – omission is the women whose unpaid efforts are overlooked by economic policy.

If GDP counted women, argues economist Diane Coyle in this piece, then GDP would look very different. In a 2011 study, the OECD found that so-called “home production” would add between 20% and 50% to the GDP of its member countries.

Thankfully, old barriers are breaking down, and an equal opportunity GDP – or its equivalent – could be closer than we think. This is down to two things: the rise of the sharing economy and shifting demographic trends in many countries (ageing populations, for example). Coyle writes:

“The time has come to reopen the 1950s debate about how we should define the economy, and ensure that GDP or its replacement counts the vital work that goes on in the home, and in the community, as well as the marketplace.”

However we decide to put a number on progress, our cities will remain the main engines of economic growth. Elsewhere in our series, Parag Khanna, a senior research fellow at the Lee Kuan Yew School of Public Policy in Singapore and a Young Global Leader alumni, breaks down the extraordinary contribution of the world’s urban clusters towards a nation’s economic status.

“Within many emerging markets,” he writes, “the leading commercial hub accounts for at least one-third or more of national GDP. In the UK, London accounts for almost half of Britain’s. And in America, the Boston-New York-Washington corridor and greater Los Angeles area together combine for about one-third of America’s GDP.”

With the rapid growth of megacities and urban corridors (some as big as 100 million people) soaking up investment and attracting talent from smaller cities and rural areas, spreading this wealth around is a challenge governments around the world will have to face up to.

This map shows the distribution of the entire world’s population, with yellow representing the densest areas. The circles show the GDP of the world’s existing megacities, while dotted circles indicate burgeoning megacities.

Image: Connectography

Inequality, happiness, sustainable development – all are inextricably linked to whatever the world’s leading economists and policy-makers decide to do next. This matters to all of us, and we hope this is reflected in this series.

As Joseph Stiglitz said in Davos: “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.”

Follow our Beyond GDP series here.


Written by

Ross Chainey, Digital Media Specialist, World Economic Forum

The views expressed in this article are those of the author alone and not the World Economic Forum.


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