Measuring Standard of Living: Real GDP per Capita vs. Alternative Indicators, Study notes of Innovation

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HOW DO WE MEASURE

“standard of livin

For most of us, standard of living is a know-it-when-I-see-it concept. We might not be able to express it in precise terms, but we think we know it when we see it. Ask us to define it, and we’ll reel off a list of things we associate with living well: a nice car, a pleasant place to live, clothes, furniture, appliances, food, vacations, maybe even education. Ask us to measure it, and we’ll probably look at whether or not we’re “doing better” than our parents. Yet there is a generally accepted measure for standard of living: average real gross domestic product (GDP) per capita. Let’s break it down piece by piece:

• GDP measures annual economic output — the total value of new goods and services produced within a country’s borders.
• Real GDP is the inflation-adjusted value.
• Average GDP per capita tells us how big each person’s share of GDP would be if we were to divide the total into equal portions.

In effect, we take the value of all goods and services produced within a country’s borders, adjust for inflation, and divide by the total population. If average real GDP per capita is increasing, there’s a strong likelihood that: (a) more goods and services are available to consumers, and (b) con- sumers are in a better position to buy them. And while buying more things won’t necessarily help us find true happiness, true love, or true enlighten- ment, it is a pretty good indicator of our material standard of living. But as a tool for measuring how well we live, GDP per capita has its shortcomings. There are lots of things it doesn’t take into account, including:

Unpaid work — Real GDP per capita doesn’t acknowledge the value of housework, in-home child care, in-home elder care, volunteer work, and community service.

Distribution of wealth — There’s always the possibility that a large share of the gains in real GDP per capita will go to a relatively small per- centage of the population. And, in the bad old days, gains were also more likely to be skewed along gender, racial, and ethnic lines.

Changes in the quality of life — Real GDP per capita doesn’t fully account for the value of things like clean air, clean water, more leisure time, and increased life expectancy; nor does it fully account for the cost of such undesirable changes as increased traffic congestion or loss of open space.

Changes in the quality of goods — Real GDP per capita doesn’t fully reflect the fact that your new furnace is far more efficient than your old one or that the components on your low-end mountain bike were considered state-of-the-art five years ago. (But GDP figures make some adjustments for quality improvements to cars, computers, and a few other items.)

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60th — dead last — in productivity.) Yet when all is said and done, people living in a place that ranks low in standard of living may firmly believe they live better than people in higher ranking places. Standard of living numbers don’t necessarily define how well we live — or how well we think we live. So, does that mean standard of living and real GDP per capita aren’t valid measures? Not all. But it does underscore the fact that stan- dard of living, quality of life, and social well- being are not interchangeable terms.

Alternative measures

There are other standard-of-living yard- sticks besides real GDP per capita. We’re not endorsing these alternatives, nor are we dis- missing them. We just thought readers might want to know something about them. Here are three such alternative indicators:

1. GPI: The Genuine Progress Indicator The people at Redefining Progress, a non- profit public policy organization based in northern California, maintain that GDP was never intended as “the primary scorecard of a nation’s economic health and well-being.” It is, they say, “merely a gross tally of products and services bought and sold, with no distinctions between transactions that add to well-being, and those that diminish it.” So in 1995, they developed the Genuine Progress Indicator (GPI), which they believe is “a more accurate measure of progress.” The Redefining Progress web site, http://www.rprogress.org, gives a ten-point comparison between GDP and GPI. Here are some of the points it covers: - Crime and family breakdown — “Social breakdown imposes large economic costs on individuals and society, in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as addi- tions to well-being. By contrast, the GPI sub- tracts the costs arising from crime and divorce.” - Household and volunteer work — “Much of the most important work in society is done in household and community settings: child care, home repairs, volunteer work, and so on. These contributions are ignored in GDP because no money changes hands. To correct this omission, the GPI includes, among other things, the value of household work figured at the approximate cost of hiring someone to do it.” - Income distribution — “A rising tide does not necessarily lift all boats — not if the gap between the very rich and everyone else increases. Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.”

• Pollution — “The GDP often counts pollution as a double gain; once when it’s created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.” 2. HDI: The Human Development Index The Human Development Index (HDI) offers a global perspective on the question of how well people are living. Devised by the United Nations in the 1990s, the HDI is a composite of three different indicators: (1) life expectancy at birth, (2) education as measured by a combination of school enrollment and adult literacy, and (3) standard of living as measured by a variation on GDP per capita that adjusts for price differences between countries (purchasing power parity in U.S. dollars).

The United Nations Human Development Report 2002 (http://www.undp.org/ hdro) lists HDI rankings for 173 countries. It notes some alarming facts:

• Nearly one billion of the world’s people don’t have

GDP and GPI, 1950-1995, in 1996 Dollars 45, 40, 35,

30, 25, 20,

15, 10, 5, 0 (^1950 1955 1960 1965 1970 1975 1980 1985 1990 ) Source: Redefining Progress.

Genuine Progress Indicator

Gross Domestic Product

Human Development Index

10 Highest-Ranked Countries

Norway Sweden Canada Belgium Australia United States Iceland Netherlands Japan Finland

Source: Human Development Report 2002, United Nations Development Programme

access to improved water sources; 2.4 billion lack access to basic sanitation.

• Eleven million children under the age of five die each year from preventable causes. That’s equivalent to more than 30,000 deaths a day.
• Approximately 1.2 billion people live on less than $1 a day; 2.8 billion live on less than $2 a day.

But there were also some encouraging trends:

• A child born in 2002 could expect to live eight years longer than one born in the early 1970s.
• The share of rural families with access to safe water has grown more than fivefold since the early 1970s.
• Between 1975 and 1998, average incomes in developing countries nearly dou- bled in real terms, from $1,300 to $2,500. 3. Index of Social Health Marc Miringoff is director of the Fordham University Institute for Innovation in Social Policy. Marque-Luisa Miringoff is a professor of sociology at Vassar College. Together, they

developed the Index of Social Health, which they describe as “a broad- based gauge of the social well-being of the nation, similar in concept to the Dow Jones Average or the Gross Domestic Product.” Published annu- ally since 1987, the index uses government data for 16 social indicators to create profiles and rankings for all 50 states. In 2001, Iowa ranked number one with a score of 73 out of 100. New Mexico finished at the bottom with a score of 21.4. Marc Miringoff places particular emphasis on three of the indicators — child poverty, health care coverage, and high school completion. In an interview with The New York Times he observed that, “A state does not do well without doing well in these three indicators, and a state doesn’t do badly without performing poorly in these areas.... [I]f you want to get more bang for your buck, or you don’t want to monitor all 16 indicators, concentrate on these things to improve life in your state.”

150 125 100

75 50 25

0

8000

6000

4000

2000

0

Index GDP, '96$in Billions

1970 1974 1978 1982 1986 1990 1994 1998

Index of Social Health and Gross Domestic Product, 1970-

Gross Domestic Product

Index of Social Health

Source: Fordham Institute for Innovation in Social Policy.

The Sixteen Indicators in the Index of Social Health

1. Affordable housing 9. Age 65-plus poverty
2. Alcohol-related traffic fatalities 10. Child abuse
3. Child poverty 11. Health care coverage
4. High school completion 12. Inequality in family income
5. Infant mortality 13. Life expectancy
6. Teenage births 14. Teenage drug use
7. Unemployment 15. Violent crime
8. Wages 16. Youth suicide