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Questioning whether GDP still adequate to measure welfare
Economic activity acts through the choices that people make about how to allocate their resources. Our decisions regarding saving, spending, technology usage and labor market participation vary between one and another, and also among countries.
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The poverty data of Statistics Indonesia (BPS) might provide us with information on the main determinants of consumption-based poverty in the provinces. Yet, when it comes to the non-monetary dimensions of poverty, we remain clueless. (JP/PJ Leo)
J
oseph Stiglitz, a Nobel laureate in economics, said, “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.”
What does it mean when a country’s gross domestic product (GDP) is high? Why does GDP vary among countries? Why do economists compare countries’ GDPs to diagnose one country as economically better than another? Before we go any further, let us define GDP itself.
GDP is used to show what a country is good at producing. It was first created for the United States government by Russian-born economist Simon Kuznets only after World War II and the Great Depression and before modifications made by the renowned economist John Maynard Keynes, who turned it into the index we know today.
GDP is the country’s total economic output in a year and consists of four components, namely personal consumption, business investment, government spending and net exports. In sum, GDP is a measurement calculated based on our economic activities as an individual, business and/or organization and government.
This measurement has become a critical tool used by economists, politicians and academics to understand society. It has been even labelled the most powerful statistical figure in human history and was named one of the greatest inventions of the 20th century by the Federal Reserve Bank of the US.
Economic activity is a set of activities in creating, providing, purchasing or selling goods or services. Any action that involves producing, distributing or consuming products or services is an economic activity.
Additionally, any activities involving money, or the exchange of products or services, are economic activities. Derivatively speaking, economic activity is a typical measurement used to calculate GDP.
