Why are we better off just because we are producing more or our GDP rises?in terms of what are we better off?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

We are better off in terms of how much our economy is producing, in dollar terms.

Now, you should be aware that GDP does not really claim to be a measure of how "well-off" a country is.  Economists know that they cannot measure things like happiness.  And they know they cannot measure what is fairer and what is less fair.

So, is a country better off with a lower GDP but more equal distribution of income?  Or lower GDP and more vacation days?  That cannot be answered by economists.

All that GDP claims to measure is the value of what a country's economy produces.  It does not claim to measure whether a country is better-off than some other country.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

To answer this question meaningfully we need to first clarify the meaning of the term "we" used in the question. If the term refers to the whole economy, an increase in GDP always indicate an improvement in the total production. However, if the term we refers to people in the economy, an increase in GDP may not necessarily indicate improvement in economic income of the people. A better measure of earning of the people is per capita GDP.

Subject to the clarification given above, we can say that GDP or production is an indicator of how much better or worse off people are only in terms of their economic condition. There are many other factors that contribute to happiness and well being of people. For example, the GDP does not take into account the impact of increased economic activity on important determinants of human welfare like environment, living conditions, crowding, and leisure time

Another major limitation of GDP is that it does not take i to consideration either the way income is distributed between people in the economy, and the purpose for which the production is used. Thus when the income distribution is highly uneven, a few people may roll in luxury of economic wealth, while a large population lives in condition of great economic poverty and misery. Also the total income of the economy may be used for purposes that may add nothing to the immediate economic welfare of the people. For example, spending on building up a stockpile of nuclear weapon and other means of mass destruction is included in GDP but it does not add to the goods and services available for consumption of people in the society.

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