Measuring Social and Economic Development

Beyond the GDP

Questions Addressedin This Presentation

• What are economic indicators? • Why are economic indicators important? • What are the most common economic

indicators?• What does GDP, the most common economic

indicator, reveal and conceal about the health of the economy?

• What are some of the alternative indicators and indices that have been developed to measure social and economic well-being?

What is an indicator? • Dictionary Definition: “something observed

or calculated that is used to show the presence or state of a condition or trend.”

• Examples of common indicators: thermometers (measure temperature); scales (measure weight); stethoscopes (measure heartbeat); rulers (measures distance); speedometers (measure speed).

What is an Economic Indicator?

• Economic Indicators are statistical measures which reflect the overall health of the economy.

Why Are Economic Indicators Important?

• Economic indicators are important because they suggest to investors, politicians, citizens, etc., how well the economy is doing at a given point in time.

• Based on this knowledge, important investing and public policy decisions are made, which affect all of us as stockholders, consumers, citizens, etc.

What Are the Most Common Economic Indicators?

• Gross Domestic Product (GDP)• Stock market averages (e.g., DIJA, NASDAQ,

S&P 500, etc.)• Unemployment rate• Inflation rate• Can you think of other common economic

indicators?

• They are hundreds if not thousands of economic indicators, but the two most commonly reported in the United States are:

1) The Gross Domestic Product (GDP), which is reported on a quarterly basis (i.e., every three months).

2) The various stock market averages (e.g., the Dow Jones Industrial Average (DIJA), the NASDAQ Composite Index, and the Standard & Poor’s (S & P) 500), which measure stock market activity on a daily basis (Monday through Friday).

Common Economic Indicators

Reporting GDP :A Wall Street and Media Ritual

• On a quarterly basis, the U.S. Commerce Department releases its GDP figures and the media always report on them.

• An illustrative example is the article “Economy Grew 3.9% in 3rd Quarter” which appeared in the New York Times on October 31, 2007.

Economy Grew 3.9% in 3rd Quarter• The article begins, “The economy

expanded faster than expected in the third quarter, led by a surge in consumer spending and exports…”

• Interest rates, business spending, residential spending, inflation, employment figures, and stock market levels are also mentioned.

• Question: What do these figures reveal (and conceal) about the health of the economy?

Let’s Take A Closer Look at GDP!

• Definition: GDP is the market value of all the goods and services produced by a country during the course of a year.

• Formula: GDP = consumption + investment + government spending + (exports - imports)

• Strength(s): GDP is good at measuring the amount of market-recognized economic activity that takes place in a given country.

1 11 Russia (979,048)

2 Japan (4,367,459) 12 India (886,867)

3 Germany (2,897,032) 13 South Korea (888,267)

4 China (2,630,113) 14 Mexico (840,012)

5 United Kingdom (2,373,685) 15 Australia (754,816)

6 France (2,231,631) 16 Netherlands (663,119)

7 Italy (1,852,585) 17 Turkey (392,590)

8 Canada (1,269,096) 18 Belgium (393,590)

9 Spain (1,225,750) 19 Sweden (385,293)

10 Brazil (1,067,706) 20 Switzerland (377,240)

The World Bank’s GDP Rankings (2006)

U.S. Millions of Dollars

GWP = $48,244,879,000,000

The U.S. accounts for approximately 1/4th of the Gross World Product (GWP)!!!

United States (13,244,550)

The IMF’s GDP Per Capita Rankings (2006)

Purchasing Power Parity (PPP)

1 Luxembourg ($80,471) 11 United Kingdom ($35,051)

2 Ireland ($44,087) 12 Finland ($34,819)

3 Norway ($43,574) 13 Belgium ($34,478)

4 14 Sweden ($34,409)

5 Iceland ($40,277) 15 Qatar ($33,049)

6 Switzerland ($37,369) 16 Australia ($32,938)

7 Denmark ($36,549) 17 Singapore ($32,867)

8 Austria ($36,031) 18 Japan ($32,647)

9 Canada ($35,494) 19 Germany ($31,095)

10 Netherlands ($35,078) 20 Italy ($30,732)

United States ($43,444)

GDP Can Be Deceiving

• GDP does not take into account the distribution of income or wealth.

• GDP does not account for the black market nor does it recognize the non-monetary economy (e.g., housework, volunteering, etc.).

• GDP does not account for externalities like crime, divorce, and natural disasters. In fact, it treats them as economic gain.

What’s Wrong with GDP As A Measure of Progress?• In the words of one critic, GDP “works like a

calculating machine that adds but cannot subtract. It treats everything that happens in the market as a gain for humanity, while ignoring everything that happens outside the realm of monetized exchange, regardless of the importance to well-being.”

Click here to access a short (4 page) explanation of some of the problems with GDP.

What’s the Economy for, Anyway?

Simon Kuznets, the Nobel Prize-winning economist andcreator of the GDP as a measurement tool, warned against treatingGDP as a gauge of progress.

“Distinctions must be kept in mind between quantity and quality of

growth, between its costs and return, and between the short and long run…Goals for more growth

should specify more growth of what and for what.”

What’s the Economy for, Anyway?

• GDP growth may well be a means to economic development, but it should NOT be considered an end in itself!!!

• After all, some growth may bad for well-being (e.g., pollution, crime, war, etc.).

• That’s why it’s important to ask the question:

• What’s the Economy for, Anyway?

1 Azerbaijan (19) 11 Hungary (26.9)

2 Denmark (24.7) 12 Ukraine (28.1)

3 Japan (24.9) 13 Albania (28.2)

4 Sweden (24) 14 Germany (28.3)

5 Czech Republic (25.4) 15 Slovenia (28.4)

6 Slovakia 25.8) 16 Rwanda (28.9)

7 Norway (25.8) 17 Croatia (29)

8 Bosnia and Herzegovina (26.2) 18 Austria (29.1)

9 Uzbekistan (26.8) 19 Bulgaria (29.2)

10 Finland (26.9) 20 Belarus (29.7)

73 United States (40.8)

What’s the Economy for, Anyway?

The World Bank’s Income Inequality Rankings (2006)

An imbalance between rich and poor is the oldest and most fatal ailment of all republics -- Plutarch

Inequality

The United Nation’s Life Expectancy Rankings (2005)

30 United States (77.5)

Expectancy1 Japan (82.2) 11 Norway (79.6)

2 Hong Kong (81.8) 12 France (79.6)

3 Iceland (80.9) 13 New Zealand (79.3)

4 Switzerland (80.7) 14 Austria (79.2)

5 Australia (80.5) 15 Belgium (79.1)

6 Sweden (80.3) 16 Germany (78.9)

7 Italy (80.2) 17 Singapore (78.9)

8 Canada (80.2) 18 Finland (78.7)

9 Israel (80) 19 Cyprus (78.7)

10 Spain (79.7) 20 Malta (78.76)

What’s the Economy for, Anyway?

Life

The United Nation’s Infant Mortality Rankings (2006)

32 United States (6.3)

InfantMortality

1 Iceland (2.9) 11 Belgium (4.2)

2 Singapore (3) 12 France (4.2)

3 Japan (3.2) 13 Spain (4.2)

4 Sweden (3.2) 14 Germany (4.3)

5 Norway (3.3) 15 Denmark (4.4)

6 Hong Kong (3.7) 16 Austria (4.4)

7 Finland (3.7) 17 Australia (4.4)

8 Czech Republic (3.8) 18 Luxembourg 4.5)

9 Switzerland (4.1) 19 Netherlands (4.7)

10 South Korea (4.1) 20 Israel (4.7)

What’s the Economy for, Anyway?

• In November of 2007, the European Commission, the European Parliament, the Club of Rome, the World Wildlife Foundation, and the Organization for Economic Cooperation and Development put on a conference entitled “Beyond GDP.”

• Click here to view a short video clip about GDP that emerged from the conference.

• The conclusion that emerged from the conference was the following:

• “GDP, the best-recognized measure of economic performance in the world, is often used as a generic indicator of progress. However, the relationship between economic growth as measured by GDP and other dimensions of societal progress is not straightforward. Effectively measuring progress, wealth and well-being requires indices that are as clear and appealing as GDP but more inclusive than GDP—ones that incorporate social and environmental issues. This is especially important given global challenges such as climate change, global poverty, pressure on resources and their potential impact on societies.”

A Sampling of Alternative Measures of Economic and Social Well-Being• Human Development In

dex• Canadian Index of Well-

Being• Ecological Footprint• Calvert-Henderson

Quality of Life Indicators• Genuine Progress

Indicator• Happy Planet Index

• Index of Sustainable Economic Welfare

• Sustainable Society Index

• Living Planet Index• Measure of Domestic

Progress• Sustainable National

Income• Environmental

Performance Index

Should the United States develop anAmerican Index of Well-Being to replace

or supplement GDP? If so, whatindicators should it include?

What’s the Economy For, Anyway?

A Project of the Center for Communication and Civic Engagement

at the University of Washington.