GDP: The Half-Baked Measure of Development


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The objective measures of development founded in the Human Development Index have often focused on indicators such as income per capita, health, the education of individuals, etc. measured from an external agent’s perspective and not as reported by the individual to determine the wellbeing of the individual. The expectation has been that an increase in income will positively affect an individual’s utility as it allows for an increase in consumption. However, objective measures of development have their weaknesses as consumption is not necessarily a revealed preference of wellbeing and neither does utility equate to wellbeing. A country’s performance should thus not only be restricted to how much output it can generate.


Studies on nation performance are moving towards an inclusive and holistic approach of measuring development by incorporating subjective measures of development as self-reporting of perceived income ranking tends to give a more accurate image of subjective wellbeing compared to measures based on reported income surveys. Per the OECD, subjective wellbeing is “good mental states, including all of the various evaluations, positive and negative, that people make of their lives and the affective reactions of people to their experiences” thereby including both short-term and long-term measures of subjective wellbeing. Posel and Casale's (2011) findings support the need for subjective measures of development given an individual’s perceived relative status has a significantly larger effect on subjective well-being than objective measures of relative status based on reported income.


Argument Against Objective Measures

One of the main goals of development is that citizens should be able to live a quality life and have a good standard of living. We cannot rely on aggregated numbers to have a holistic picture of the economy without the individual perceptions of people as they are the economic agents who fundamentally make up an economy. It is in light of this that subjective measures of development which put the person at the center and incorporates other indicators beyond income and physical wellbeing are important in measuring development because it is possible that the economy could be growing but leaving the people behind, a situation where income per capita is high but the majority live in poverty especially when there is high inequality and poverty.


Argument Against The Use Of Subjective Measures

While self-reporting of perceived ranking tends to give a more accurate image of subjective wellbeing compared to measures based on reported income surveys, self-reporting presents the problem of measurement errors given responses could be a reflection of one’s attitude towards life and not that of their wellbeing. Surveys are also generally plagued with the possibility of misreporting for various reasons such as bias due to previous events or the potential of Condorcet cycles thus objective measures tend to be favoured as they present facts and are not rooted in psychology. Subjective wellbeing may also not be as subjective as anticipated given the indicators included are not random and are based on the common assumption that those are the factors that best contribute to how people determine their life satisfaction.


Argument For Both Measures

It is important that we have both objective and subjective measures of development as they provide a clearer picture of the stability of a country. From 2008 to 2010 Tunisia had a 7 percent increase in GDP per capita while during the same period life satisfaction declined by 10 percent, Egypt also had an increase in GDP per capita of 34 percent between 2005 and 2010 while there was a 50 percent decrease of people who saw themselves as thriving in that same period. The decline in life satisfaction despite the growth in GDP per capita can very well be seen as the catalyst for the Arab Spring. Taking both measures into account is thus imperative in giving a complete picture of the growth path of the economy as well as identifying appropriate policy measures to avoid incidents such as the Arab Spring.


An example of incorporating both objective and subjective wellbeing measures is the Gross National Happiness (GNH) put in motion by the Bhutan King in 1972 which has 9 domains of happiness including, “1) psychological well-being, 2) health, 3) time use, 4) education, 5) cultural diversity and resilience, 6) good governance, 7) community vitality, 8) ecological diversity and resilience and 9) living standards” (Pandyaswargo et al., 2015).

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