Smile, your GDP is high!

If you live in the U.S., you're rich. Even if you are homeless and reading this article in a public library. How do we know that? Your GDP is high!

What is the GDP?
The Gross Domestic Product (GDP) is in economics the leading indicator of the wealth of a country.
It is calculated by adding-up private consumption, business investments, government expenditures, and the difference (positive or negative) between exports and imports.

By dividing that figure by the number of inhabitants, the GDP per capita is also usually used as an indicator of the standard of living in that country.

The problem with the GDP is that it incorporates in one single figure the wealth of its largest corporations and the wealth of its poorest citizens and doesn’t discriminate between the two. And this is where it all goes wrong.

For example, in an oil-rich country where most of the profits are shared by the king and the royal family but the majority of its inhabitants are nomadic herders, the GDP per capita might seem high and still not represent the standard of living of most citizens.

In many democratic countries the GDP, albeit insufficient, might be a way to compare countries with similar economic structures. But in the U.S., which is home to most of the largest corporations in the world while the poorest segment of the population is only slightly above third-world country standards, the GDP is definitely not a good indicator of the standard of living.

There are many other criteria where the GDP fails.
Natural disasters and wars, by increasing corporate productivity, also increase the GDP but not in a way that benefits the general population.

Increase in energy prices and gasoline prices will boost both corporate profits and consumer spending and show-up as a positive factor for the GDP. But they will in fact reduce the standard of living.

And GDP doesn’t take into consideration economic activity that might inflate the GDP in the short run but could be detrimental to the country in the long run.

European countries have finally come to the realization that other factors must be computed in to judge the well being of a country. An international conference was held in Brussels in November 2007, with some of the top economists in the world, as an attempt to revise the established simplistic view of the standard of living.

Below are links to some of the presentations that were made during the conference, and also a link to all the presentations.

Measuring progress, true wealth and well being.
By Joaquín Almunia, European Commissioner for Economic and Monetary Policy.
http://www.beyond-gdp.eu/download/almunia_speech.pdf

The European contribution to a global effort: next steps in measuring progress.
By Stavros Dimas, Member of the European Commission, responsible for environment.
http://www.beyond-gdp.eu/download/Dimas_speech.pdf

All Beyond-GDP presentations:
http://www.beyond-gdp.eu/presentations.html