Measuring economic progress: alternatives

Hi, my name is Mariano Torras. I'm a Professor of Economics at Adelphi University in New York. We are going to be doing a lecture series on macroeconomics.

Up to this point, we have not questioned the idea that national income serves as a reliable indicator of well-being and that GDP growth signifies economic progress. Indeed, it is this idea that is behind the overwhelming attention given to GDP growth by policymakers and other political leaders, but the GDP measure is also recently under increased scrutiny and even criticism, and a number of alternatives have been recommended. There are a number of problems with the GDP measure itself. First, is a matter of measurement inaccuracy. The claim that GDP is based on price, quantity averages, and approximations and that it can, therefore, never be precisely known is true. Many, however, believe GDP estimates to be reasonably sound, but more importantly, GDP does not at all account for what is known as the informal economy, which is sometimes also referred to as the unofficial economy- the total of all undocumented economic activity. We are referring not only to the market transactions underlying illegal activities, but also to legal activities for which payment is made in currency or under the table. Therefore, frequently going unreported. The informal economy accounts for a significant percentage of the overall economy in most rich countries. Some economists have found that it could account for one-half or more of the economy in poor countries. The second problem is that the per capita GDP measures that we often use is only a per person average. It says nothing about the distribution of income across society. If there were two countries with the same per capita income where one had many more rich people than the other, this country would need to have many more poor people as well. So, per capita GDP gives us no indication of how equal or unequal the distribution of income is. This weakness is increasingly important as inequality is on the rise in many of the world's countries. In the United States, for example, even though per capita GDP has continued to increase over the years, the median income has remained fairly flat. This is a clear indication that the already well-off members of society are receiving most of the economic gains. A third problem is the importance that policymakers place on GDP is a sign that they confuse income and wealth. Unlike GDP, wealth is something that the country accumulates, like productive factors, such as natural, human or manufactured capital. Because these are accumulated, we say that wealth is a stock concept. Income is produced by wealth or productive factors and it also adds to these.