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The Many Flaws in GDP and Our View on “Living Standards”

The ultimate purpose of a capitalist monetary economy is to provide goods and services which enrich consumers.   In other words, capitalists compete to provide goods and services that make consumers better off.  Of course, it’s much more complex than that, but for the sake of simplicity I hope you get the point.

We measure the success of this process through things like Gross Domestic Product.  But the funny thing is that we don’t actually measure whether we’re necessarily better off or not through measurements like GDP.  We are just measuring the quantity of output sold.  For instance, the internet has made countless billions of people better off than they otherwise would be.  Heck, social media has led to entire uprisings in some countries.  But so much of what’s on the internet is free.  It’s not even counted in GDP!  This is hundreds of billions if not trillions in output that isn’t even calculated.  So the whole concept of GDP is an extremely nebulous concept with regards to what really matters to us which is our quality of life.  Of course, “quality of life” is also a rather nebulous concept, but it’s certainly not equal to the quantity of crap we make in a given period.

Anyhow, I got to thinking about this while listening to a really excellent podcast today in which Russ Roberts talks to Diane Coyle, the author of GDP: A Brief but Affectionate History about how she views this measurement we all have come to know.  Give it a listen as she does a nice job debunking some myths about what GDP is, how it’s measured and how it actually relates to what matters.

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