Is GDP still a good measure of standard of living?

Byline: Amna S. Sandhu

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Government expenditure is a critical factor in the calculation of Gross Domestic Product (GDP) of any country. Hence, it is important to note how the upcoming budget for Pakistan will have an impact on the well-being of the overall society. Even if people do not know what GDP means or even stands for, they regard it as an important indicator. This status comes from a long and frequent use of GDP to measure and compare the economic state of any country, globally.

It has almost been 80 years since the concept of GDP was introduced. GDP essentially indicates the society's standard of living by measuring all the consumption by individuals in a country, all the investment by businesses in the country and all the purchases by the government and foreigners made locally minus the purchases of things made abroad. It is one of the most popular indicators to measure an economy's output and growth relative to other countries. It is important as it gives a bird's eye-view of how an economy is doing. A higher GDP is generally a good sign indicating more jobs, better salaries and more investments - overall a lot of good things happening in a country.

However, by any means it is not a complete picture of a national economy. Though, why is it important, what metric in primarily used? The problem arises when over-reliance of one metric such as GDP distorts decision-making as it plays a critical role for the basis of formulating policy and setting priorities. Thus, a higher level of GDP should not be the sole goal of any governments macroeconomic policy.

Lately, a lot of researchers and economists have concluded GDP to be no longer a useful measure of economic progress. GDP tends to have skewed priorities as it does not account for many factors that are important as they impact people's happiness even if they are not bought and sold in a marketplace such as leisure, natural capital, quality of health and education, inequality, technological advancements and overall positive or negative value placed on the type of output by society. Therefore, in order to generate a better and more meaningful economic-welfare metric, it needs to account for other important components.

Though, there is no consensus on a possible alternative, yet. Establishing a new replacement requires a new concept of prosperity and a technique to measure change in living standards. There are several potential alternatives being discussed around...