IGCSE Y11: Problems of GDP/Capita as a measure of Living Standards

GDP TREATS CRIME, DIVORCE AND NATURAL DISASTERS AS ECONOMIC GAIN


Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer's fees, the need to establish second households and so forth. Hurricane Andrew was a disaster for Southern Florida. But the GDP recorded it as a boon to the economy of well over $15 billion.

GDP IGNORES THE NON-MARKET ECONOMY OF HOUSEHOLD AND COMMUNITY

The crucial functions of childcare, elder care, other home-based tasks, and volunteer work in the community go completely unreckoned in the GDP because no money changes hands. As the non-market economy declines, and its functions shift to the monetized service sector, the GDP portrays this process as economic advance. The GDP also adds the cost of prisons, social work, drug abuse and psychological counseling that arise from the neglect of the non-market realm.

GDP TREATS THE DEPLETION OF NATURAL CAPITAL AS INCOME

The GDP violates basic accounting principles and common sense by treating the depletion of natural capital as income, rather than as the depreciation of an asset. The Bush Administration made this point in the 1992 report of the Council on Environmental Quality. "Accounting systems used to estimate GDP" the report said, "do not reflect depletion or degradation of the natural resources used to produce goods and services." As a result, the more the nation depletes its natural resources, the more the GDP goes up.

GDP INCREASES WITH POLLUTING ACTIVITIES AND THEN AGAIN WITH CLEAN-UPS

Superfund clean-up of toxic sites is slated to cost hundreds of billions of dollars over the next thirty years, which gets added to the GDP. Since the GDP first added the economic activity that generated that waste, it creates the illusion that pollution is a double benefit for the economy. This is how the Exxon Valdez oil spill led to an increase in the GDP.

GDP TAKES NO ACCOUNT OF INCOME DISTRIBUTION

By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all.

GDP IGNORES THE DRAWBACKS OF LIVING ON FOREIGN ASSETS

In recent years, consumers and government alike have increased their spending by borrowing from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a growing burden on our national economy. To the extent that Americans borrow for consumption rather than for capital investment, they are living beyond their means and incurring a debt that eventually must be repaid. This downside of borrowing from abroad is completely ignored in the GDP.

GDP IGNORES THE 'INFORMAL ECONOMY' (BLACK MARKET)

Many countries have a huge black market, where products and services are traded but not taken into account in any official data. Anyone who gets paid 'Cash in hand' will not declare this and therefore actual GDP data will be much higher than the official figures suggest.
 
GDP DOES NOT TAKE INTO ACCOUNT WHAT IS ACTUALLY PRODUCED AND WHO PRODUCES IT
 
GDP/capita data may be low in Cuba compared to the USA, but Cuba has an excellent education & health service as the government spend billions each year ensuring these key industries are well resourced. Conversely, when the USA spends billions on weapons, this may not directly help many people living standards.