Wednesday, May 28, 2014

Why GDP Per Capita Growth Does Not Improve Well Being In Rich Countries

Ed Dolan raises an old debate and he provides his answer in this article.  The old debate centers around the relationship between GDP growth and well being.  GDP is a crude measure of what is produced in an economy.  Therefore, it makes sense to ask whether growth in per capita GDP correlates with well being.  Dolan compares the growth in per capita GDP with growth in the Social Progress Index (SPI) which is used as a measure of well being.  Growth in per capita GDP is strongly correlated with the growth in SPI in poor nations.  The correlation weakens, however, when per capita GDP reaches $25,000.  The US has a very high per capita GDP score but it ranks very low on the SPI curve.  Dolan concludes that the US should focus on improving the output of the economy instead of focusing on growth in per capita GDP.  He makes some suggestions about how that might be accomplished.  We don't need an economy with zero growth.  An economy with a focus on growth in SPI can be achieved without harm to the environment.  That does not imply that we should do nothing to stimulate growth in a recession.  It is important to keep the economy on its long term trend line.

Most people would agree with Dolan that GDP is poor measure of social well being, and that governments should pay more attention to well being.  Some nations do that better than the US and we could learn from them if we chose to do so.  That, of course, is what politics is all about.  It would also make more sense to focus on median PPI per capita.  The median is less sensitive to extremes than the average as a measure of central tendency. 

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