Topic 7: GDP growth-is it good enough? Or does it distort policy-making?

(DAVAA, STEEL, GEN)

Opening statement:

Growth in gross domestic product (GDP) is defined as the change in the market value of
all goods and services produced within a country relative to a certain time reference. We argue
that GDP growth is a good measure of economic progress, however, it is not enough basis for
policy-making. Worse, it can even distort policy-making by focusing on too narrow indicators
which disregard important measures of well-being.

Proponents argue that GDP growth is a good enough and indicator for policy-making on
the basis of the following: simplicity, broadness, availability and absence of no better alternative.
Their arguments are mainly based on the assumptions that simplicity is good and policy-making
is focused only on economics. Moreover, supporters advocate that in the absence of better
indicator, GDP growth serves as a good proxy. Our arguments against the soundness of GDP
growth as an indicator for policy-making are based on four essential questions:
First, does simplicity imply that GDP growth is a good enough measure of progress and
indicator for policy-making? We answer a resounding No. GDP growth is too narrow to
measure significant indicators. For instance, it does not account for accumulated wealth,
environmental degradation, economic loss and damages from calamities, and freedom, among
others.
Second, is economics the sole criteria for policy-making? What about social indicators
such as happiness, health and inequality? These are only few of important indicators which
GDP growth fails to account. These aspects can even be more valuable than simply assessing
growth based on monetary value.
Third, does the availability of an indicator hinder the development of better indicators?
The system of national accounts used today to measure GDP growth was first conceptualized in
the first half of the 20 th century. In this regard, GDP is a relatively new concept. Given significant
innovations in accounting methods and information technology, and assuming substantial
enthusiasm to pursue such complicated endeavor, it is possible to come up with new and better
indicators of well-being which can be made available for policy-makers.
Fourth, is there really no alternative? To say that something has no better alternative is to
obstruct creativity and innovation. If necessity is the mother of invention and creativity is the
father, then policy-makers should recognize the urgent need to correct the belief that GDP
growth is a good enough indicator for policy-making, and consequently, utilize innovation to
develop better indicators.
Given that GDP growth falls short in many important measures of welfare and progress,
it can distort policy-making by focusing merely on too narrow economic objectives. To deal with
the shortcomings of GDP growth, we propose to complement it with other policy measures such
as measures of inequality, poverty, happiness, environmental impact, wealth, and freedom.
Several studies have been initiated towards this goal. For instance, Khan and Calver (2014)
offered alternate measures of well-being, including (i)GDP per capita to account for changes in
population; (ii) Net Domestic Product (NDP) to adjust for capital consumption since depreciation
or capital consumption does not add to well-being; (iii) real adjusted household disposable
income (RAHDI) to assess welfare from a household perspective; and (iv) median real
household income to measure changes in distribution of income.