Can national welfare (well-being) be measured? Presently, the growth of the gross domestic product (GDP) serves as a measure for the development of welfare. Lately there has been much debate, not only in Germany, as to whether this measurement should be replaced or at least supplemented by another measure of a country’s well-being that include other indicators.
Economic growth, measured in terms of the rate of change of real GDP, has been an important economic and cyclical indicator since the 1950s and is often seen as a general indicator of the development of social well-being. But what does GDP measure?
GDP measures the market value of a country’s output, i.e. the value of the domestically produced goods and services over time minus the value of advance payments. It is thus a flow statistic and was designed as a measure of the economic activity of a national economy in a specific period. It enables a comparison of market activities over time and between countries, as a per capita measurement.
Critics of the use of GDP as an indicator for an economy’s economic performance point out that GDP does not include activities such as unpaid housework or voluntary activities. It only includes the output that can be assessed at market prices. Proponents of GDP argue that market prices contain objective information on the value of goods and services and that this reflects the preferences of consumers.
GDP should not, as is often the case, be misunderstood as a measure of the well-being of a society in a general sense since the non-physical aspects of the quality of life such as the value of leisure time, fair distribution, environmental protection, education, sustainability and social cohesion. The discussion of how to measure the level and the development of a country’s well-being has recently been sparked by the report of Stiglitz, Sen and Fitoussi (2009) “Progress Measurement of Economic Performance and Social Progress” (PDF) that proposes supplementing GDP with additional indicators that provide information on income distribution, assets and consumption, on the quality of life and sustainability .
Finally, GDP says nothing about subjective well-being. Newer approaches in economics (happiness research) examine the link between rising incomes and well-being (see for example Frey 2008; CESifo DICE Report 8(4), 2010, Content) and conclude that even if the rise in GDP leads to an increase in objective welfare this is not to say that people are subjectively better off (Easterlin Paradox, see Easterlin 1974).*
The development and implementation of alternative concepts to measure aspects of prosperity and the quality of life that could supplement GDP have been discussed at the national and international levels .
One approach seeks to extend the economic calculations of GDP by including social and ecological aspects. Non-market transactions such as housework or voluntary work is assigned a price and added to GDP, whereas activity that is harmful to society (e.g., criminality) and environmental damage enters the negative side of the balance.
A second approach proposes the construction of a comprehensive well-being or progress indicator. One example is the United Nations’ Human Development Index (HDI). The HDI includes the indicators of life expectancy, years of education, per-capita income and distribution aspects in a single measurement. Jones and Klenow (2011) in their paper “Beyond GDP? Welfare across Countries and Time” (PDF) have developed a “Welfare Index” that groups together data on consumption, leisure time, inequality and life expectancy. The Center of Applied Economic Research Münster (CAWM) has proposed the so-called life satisfaction indicator (Happiness GDP) that consists of eleven components (van Suntum 2010); the Center for Social Progress, Frankfurt at Main, has developed a progress index that consists of four single indicators (Bergheim 2010). These are just a few examples from Germany.
A third approach proposes observing a great number of indicators. In 2010 the German and French councils of economic experts jointly developed such an indicator system for economic performance, quality of life and sustainability (SVR and CAE 2010) (PDF) . It includes 25 indicators of which six are in the area of the economy, seven in the quality of life area and twelve in the field of sustainability and the environment. The indicators are presented separately and not weighted together to form a universal indicator.
A problematic aspect of all alternative approaches to GDP is that the data necessary for the assessment of the individual indices are neither readily available nor comparable. Also, the calculation methods are controversial, and the weighting of the individual indicators is ultimately random and subject to the value judgments of the respective analysts.
Since December 2010, the Enquete Commission appointed by the German Bundestag on Growth, Well-being and the Quality of Life – Ways towards a Sustainable Economy and Societal Progress in the Social Market Economy has been examining the questions of a sustainable and environmentally compatible plan for growth and a measurement of well-being and social progress that transcends GDP.
* Doubt has recently been cast on the Easterlin Paradox, however, by Stevenson and Wolfers (2008).
Bergheim, Stefan, Fortschrittsindex: Den Fortschritt messen und vergleichen , Frankfurt am Main 2010, http://www.fortschrittszentrum.de/dokumente/2010-11_Fortschrittsindex.pdf.
Deutscher Bundestag, “ Einsetzung einer Enquete-Kommission „Wachstum,Wohlstand, Lebensqualitat – Wege zu nachhaltigem Wirtschaften undgesellschaftlichem Fortschritt in der Sozialen Marktwirtschaft”, BT-Drucks.17/3853, Berlin 2010, http://dipbt.bundestag.de/dip21/btd/17/038/1703853.pdf.
Easterlin, Richard A., “Does Economic Growth Improve the Human Lot? Some Empirical Evidence”, in: P. A. David and M.W. Reder (eds), Nations and Households in Economic Growth: Essays in Honor of Moses Abramowitz , Academic Press, New York 1974, 89–125.
Frey, Bruno S., Happiness: A Revolution in Economics, The MIT Press, Cambridge, MA and London 2008, http://www.cesifo-group.de/link/_publmlser/mit_lectures_happiness08.htm
“Happiness and Economic Policy”, contributions by Bruno S. Frey and Alois Stutzer, Jon Hall, Christopher Barrington-Leigh and John Helliwell, Luis Rayo and Gary S. Becker, Andrew E. Clark, Richard A. Easterlin, Richard Layard, Alois Stutzer and Bruno S. Frey, CESifo DICE Report 8(4), 2010, 3–36. http://www.cesifo-group.de/link/_publdice/dicereportindex410.htm
Jones, Charles I. und Peter J. Klenow, “Beyond GDP? Welfare across Countries and Time”, Working Paper, Stanford University and NBE, 2011. http://klenow.com/Jones_Klenow.pdf
Sinn, Hans-Werner, “Willkürliche Wahl”, WirtschaftsWoche, 20 December 2010, 44. http://www.cesifo-group.de/link/_echomitarb/ifostimme-wiwo-20-12-10.htm
Stevenson, Betsey and JustinWolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox” , Brookings Papers on Economic Activity, 39(1), 2008, 1–102. http://ideas.repec.org/a/bin/bpeajo/v39y2008i2008-01p1-102.html
Stiglitz, Joseph E., Amartya Sen and Jean-Paul Fitoussi, Report by the Commission on the Measurement of Economic Performance and Social Progress, 2009, http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf
SVR and CAE – Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung and Conseil d’AnalyseEconomique, Wirtschaftsleistung, Lebensqualität und Nachhaltigkeit: Ein umfassendes Indikatorensystem , Wiesbaden 2010, http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Expertisen/2010/ex10_en.pdf
UN, Human Development Report 2010 – 20th Anniversary Edition. The Real Wealth of Nations: Pathways to Human Development, 2010, http://hdr.undp.org/en/reports/global/hdr2010/
van Suntum, Ulrich, “Zur Konstruktion eines Lebenszufriedenheitsindikators (“Glücks-BIP”) für Deutschland”, SOEP Papers 258, Berlin 2010.
“Wachstum, Wohlstand, Lebensqualität: Brauchen wir einen neuen Wohlstandsindikator?”, contributions by Rolf Kroker, Karl-Heinz Paqué, SefanEmpter, Albert Braakmann, Daniela Kolbe, ifo Schnelldienst 64(4), 2011, 3–18. http://www.cesifo-group.de/link/_publsd/SD04-11Abstract.htm
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