Dalia's Economic Blog

April 25, 2010

Three Limitations of using GDP as a Measure of Welfare Between Countries

Filed under: Initiative Blogs,Section 3 — dalia813 @ 6:40 AM

GDP measures the value of output produced within the domestic boundaries of a country over a year. Welfare is the health, happiness, and fortunes of a person. A sustained increase in real GDP means there is a sustained increase in the output of goods and services, and growth in the countries economy. However, Though there are three possible limitations of using GDP as a measure of welfare between countries. The three limitations are that it ignores the quality of life, it underestimates informal markets, and overestimates negative externalities.

GDP ignores to measure the quality of life. The quality of life is used to evaluate the general well-being of individuals and societies. Quality of life should not be confused with standard of living, which is based primarily on income. Instead, the quality of life includes wealth, employment, physical and mental health, education, etc.  For example, while South Africa is in the top 40 countries for highest GDP, over 50% of its people live in poverty, meaning they have a low quality of life because they lack basic human needs such as food, shelter, and access to education and healthcare, etc. Since GDP does not reflect upon the quality of life, it is limited as a measure of welfare.


GDP underestimates informal markets. GDP does not take into account black market activities, where the money spent isn’t registered. An example is if someone sells $1 million worth of illegal goods to someone else, it will not be counted in the GDP. Though the United States has a very high GDP, it has 10~20% of illegal market activities. Since GDP does take this into account, it is limited as a measure of welfare between countries.

GDP overestimates negative externalities. Negative Externalities are the bad effects that are suffered by a third party when a good or service is produced or consumed. When GDP (production) increases, negative externalities (air and water pollution) also increase. For example, China’s GDP is one of the highest in the world, but it emits more carbon dioxide emissions per year than any other country. High CO2 emissions does not equal to a country with high welfare. Since GDP does take this into account, it overestimates negative externalities, limiting it as a measure of welfare between countries.

As you can see, GDP alone is a fairly inadequate measure of welfare – other factors need to be considered. Other ways to measure domestic output and income, as well as health, happiness, and fortunes of a person can be through the gross happiness index, the genuine progress index, and the human development index.

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4 Comments »

  1. I really enjoyed looking at the graphs you made or found. They really explain what you wrote about clearly.

    Comment by bjyechan7 — April 29, 2010 @ 3:28 PM | Reply

  2. Thanks. Your points were cogent. It helped me understand GDP and its current deficiencies.

    Comment by Elisa — November 18, 2011 @ 12:24 AM | Reply

  3. Here’s an email I sent a former teacher of mine. I would appreciate seeing your perspectives.
    Hillary Clinton mentioned in her speech at the APEC Women and the Economy Summit that women should enter the work force. I think this is a great idea as it would (theoretically) provide women with more economic freedom, and thus overall empowerment.

    However, in the speech, Hillary backed her claims with the potential of women entering the workforce.

    “Unlocking the potential of women by narrowing the gender gap could lead to a 14-percent rise in per capita incomes by the year 2020 in several APEC economies, including China, Russia, Indonesia, the Philippines, Vietnam, and Korea.”

    “To achieve the economic expansion we all seek we need to unlock a vital source of growth that can power our economies in the decades to come,” Clinton told a ballroom filled with women—and some men—gathered in the same city where the original United Nations Charter was signed in 1945. “By increasing women’s participation in the economy and enhancing their efficiency and productivity, we can have a dramatic impact on the competitiveness and growth of our economies.”

    So…

    This leads to my questions:
    1. Is Clinton assuming that with an expanded economy, there would be more currency circulating so that more people would have access to material wealth?

    2. Do you agree with the idea that we should strive for bigger economies?

    3. The original problem I had with this idea is the eventual destruction of many the earth’s resources. I don’t like the idea that our current world revolves around the idea of incessant production and consumption. Can you see any realistic alternative systems?

    4. I find it a little patronizing to assume that material wealth corresponds to overall happiness. Considering the prevalent rate of divorce and depression, I’m not sure the American way of life is ideal. (However, I do appreciate my current political freedom.) What do you think?

    I appreciate any time you take to address my questions.

    Comment by Elisa — November 18, 2011 @ 12:31 AM | Reply

    • Reply (if you do reply) to this message- I neglected to select the ‘Notify by email’ option on my earlier posts.

      Comment by Elisa — November 18, 2011 @ 12:34 AM | Reply


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