Academic journal article Yale Economic Review

A New Measure of ECONOMIC PERFORMANCE

Academic journal article Yale Economic Review

A New Measure of ECONOMIC PERFORMANCE

Article excerpt

IN FEBRUARY OF 2008, seven months before the fall of Lehman Brothers, French President Nicolas Sarkozy tasked Columbia's Joseph Stiglitz and Harvard's Amartya Sen with finding a measure of national economic performance superior to Gross Domestic Product (GDP). Working with a wide array of experts - from macroeconomists to psychologists - the "Commission on the Measurement of Economic Performance and Social Progress" published their findings this September.

While economists widely accept GDP's importance as the final value of goods and services produced in an economy, some are beginning to question its validity as a measure of living standards. However, governments continue to focus on growing GDP because they believe output growth is synonymous with higher quality of life. As Stiglitz and Sen argue in their report, "What we measure affects what we do; and if our measurements are flawed, decisions may be distorted."

Why does GDP inadequately measure quality of life? First, an increase in GDP does not necessarily mean that the lives of most, or even mam', people have improved. It can actually mean that more wealth goes to the rich while middle class wages and savings are flat or even decreasing. Additionally, some economic events that increase GDP do not always make a country better off (the report cites increase in revenue for oil companies that comes with traffic jams as an example). Third, GDP does not account for sustainability. What does short-term growth matter, the report asks, if it leads to future collapse?

How do we address these problems? First, instead of considering production, we should consider income and consumption. The amount of money we make and spend is a better assessment of well-being. We must also consider wealth. If we spend everything we make or more, the well-being that we gain in the present is at expense of future well-being. In other words, the growth in our income is not sustainable. Considering income, consumption and wealth instead of production answer the criticism that GDP does not reflect distribution of income and sustainability. …

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