GDP isn't the best metric for income. It includes lots of distortions from subsidies and the such. As an example, if a country taxed all of its citizens by 10%, added a 10% import tariff, and spent all the receipts, it inflates its GDP numbers by 10% by shuffling money around faster.
A better metric of material wealth is purchasing power. For that you can take per capital income and adjusted it by local prices and taxes - assuming price mechanism is working. Under command economies like the former Soviet Union GDP numbers were meaningless.
Well-being correlates well with material wealth for the most part. Happiness is more a function of increasing well-being rather than an absolute level. If people feel like they are productive, getting wealthier, and becoming better off, they are happier. Because of that, growth of purchasing power is probably the better indicator.
Aggregates like GDP capture less of what is going on at the individual level. It won't show social mobility. It won't show income distribution or income growth distribution. That information also factors into who achieves well-being and feels happiness. You could also factor culture into the equation as well.
On November 18 2010 05:56 McFly wrote: Let me end this debacle of is GDP a good measure.
Friend asks you to eat a peice of dog crap for a million dollars. You think about how poor you are in college and agree to eat the peice of poo. As you gulp it down you figure it probably wasn't worth it, but a million dollars is all but in grasp. As you are getting the after taste of bacon bits you feel like it would only be respectful of your friend to eat some dog crap for the same price he offered you to eat it for. You point out a steamy pile for your friend to engulf into and he recently having to pay you a million decides to come up even, so he quickly eats it up for the million. Now you ask what did these students accomplish? None of them received any money but only two steamy piles of crap. Well young sir they produced two million in GDP and a taste of glory-dog poo.
Sorry about double post, but this is such a blatent misunderstanding of what the GDP actually measures. Because it is a bet between two friends, that doesn't actually produce anything (GDP=Gross Domestic product), then the GDP did not go up by $2 million dollars, it stayed at the same amount as it did before the bet.
On November 18 2010 15:55 TanGeng wrote: GDP isn't the best metric for income. It includes lots of distortions from subsidies and the such. As an example, if a country taxed all of its citizens by 10%, added a 10% import tariff, and spent all the receipts, it inflates its GDP numbers by 10%.
A better metric of material wealth is purchasing power. For that you can take per capital income and adjusted it by local prices and taxes - assuming price mechanism is working. Under command economies like the former Soviet Union GDP numbers were meaningless.
Well-being correlates well with material wealth for the most part. Happiness is more a function of increasing well-being rather than an absolute level. If people feel like they are productive, getting wealthier, and becoming better off, they are happier. Because of that, growth of purchasing power is probably the better indicator.
Aggregates like GDP capture less of what is going on at the individual level. It won't show social mobility. It won't show income distribution or income growth distribution. That information also factors into who achieves well-being and feels happiness. You could also factor culture into the equation as well.
You do realize you are arguing an unarguable point. GDP does, in fact, by definition, equal the total income of society. That is what you are paying for when you buy a product. You are buying the amount it costs to make the stuff you bought, which has the cost of labor, i.e. income, associated with it. All GDP is, is a fancy way to measure how much, in monetary value, a country produces in its own borders, as well as the total income, from poorest to richest.
As for your example, it does add 10% to the GDP, but as for RGDP, that does not go up at all. A universal 10% tax does in fact increase the income of all citizens by 10%.
If you don't believe me that GDP = Total income, please do a quick google search and tell me what sites with .edu domain names tell you otherwise. I'd love to see their reasoning.
Edit: I agree that GDP doesn't capture income distribution, and if that is your point, then I can't really argue against it, but I can say this, if you want equity in income, you have to accept less production in the future. However, don't be dissuaded because equity in income is still a noble goal nonetheless, you should just understand the consequences of such policies. Its the same sort of cost benefit analysis that says that price ceilings on rental prices reduces the amount of people who can get cheap rent.
Purchasing power doesn't still tell the proper story even about how much stuff one has/can afford. It varies so much whether different things are bought, or just given or traded unofficially.
On November 18 2010 16:07 elkram wrote: If you don't believe me that GDP = Total income, please do a quick google search and tell me what sites with .edu domain names tell you otherwise. I'd love to see their reasoning.
So I missed writing "real income" instead of "income". I'd thought the rest of the post made it clear enough.
On November 18 2010 16:07 elkram wrote: If you don't believe me that GDP = Total income, please do a quick google search and tell me what sites with .edu domain names tell you otherwise. I'd love to see their reasoning.
So I missed writing "real income" instead of "income". I'd thought the rest of the post made it clear enough.
If your point was to say that GDP isn't the best measure of real income, then I agree with you because GDP doesn't measure real income, RGDP (Real GDP) does. And yes, they are very different statistics.
On November 18 2010 16:07 elkram wrote: Edit: I agree that GDP doesn't capture income distribution, and if that is your point, then I can't really argue against it.
No. That is not my point. And I don't care about perfect income equality. Equalities serves its purposes, and inequalities serves its purposes.
The focus of the thread is still "happiness," right?
On November 18 2010 16:07 elkram wrote: Edit: I agree that GDP doesn't capture income distribution, and if that is your point, then I can't really argue against it.
No. That is not my point. And I don't care about perfect income equality. Equalities serves its purposes, and inequalities serves its purposes.
The focus of the thread is still "happiness," right?
I thought it was progress. That's why I said in order to measure progress you should use RGDP and CPI-U. But if this whole thing was about happiness, then this thread is incorrectly titled.
On November 18 2010 15:54 elkram wrote: I could have gone into lecture mode, but I decided against since it involves a lot of stuff that most people don't have the patience for.
Is GDP the "right" measure of progress?
No. In fact, when talking about progress most economists don't even bother with GDP, they talk about RGDP (Real GDP) and the GDP Deflater. That is only if they want to talk about GDP. In fact, I'm surprised that a thread with 90+ posts, not one person has mentioned RGDP, it's as if no one here has taken economics (that's how it appears, not trying to slight any previous posters). I also haven't seen any mention of GDP=Total Income, or GDP = C (consumer spending) + I (business investment spending) + G (government spending) + (X-M) (Trade situation, i.e. imports vs. exports). The GDP of a nation is a valuable statistic that can't be ignored. What's more, the extension of GDP, i.e RGDP, is even more valuable because it accounts for inflation.
Now, this is a pretty complicated discussion that involves knowing a lot about macroeconomics, but in my opinion I feel that RGDP, not GDP, combined with the CPI-U (Consumer Price Index of Urban Consumers) is the best way of measuring economic progress, as well as the CPI and GDP Deflater.
If anyone wants info on this go to the Bureau of Economic Analysis and Bureau of Labor Statistics websites and you'll see the values of all these fancy acronyms I brought up.
TL;DR GDP is not the right measure of progress, the RGDP + CPI-U is.
PS Consumer spending accounts for 70% of GDP/RGDP in the US, just to give some data for all the capitalist vs. socialist peeps out there.
This post, and the several that you made after it, miss the mark I'm afraid. You mention your surprise that no one has mentioned RGDP. The reason for this is that there is a statistic that is much better than RGDP that has been mentioned many times: GDP at Purchasing Power Parity (PPP) per capita. The purchasing power parity calculations take into account both relative cost of living and inflation. Essentially, what PPP tells us in addition to income is how many baskets of goods we would have to give up in one country to obtain an identical or very similar basket of goods in another country. For example, if the cost of living in China is lower than the US, then we might expect to give up .8 baskets of USA goods to receive 1 basket of Chinese goods (assuming the goods are of comparable quality). In this way, the PPP adjustment is better than RGDP per capita, as it not only tells us income, but how much stuff you can buy with that income in your country.
EPT
