- GDP and GNI statistics are widely used to measure economic activity.
- However, they may not always be appropriate to:
- Measure economic well-being.
- Make comparisons over time.
- Make comparisons between countries.
GDP/GNI do not measure economic well-being
Economic well-being
The level of prosperity, economic satisfaction, and standard of living experienced by members of an economy.
While greater GDP/GNI may be correlated to greater economic well-being, this is not always the case. This is because:
- GDP/GNI do not measure the composition of an economy's output.
- GDP/GNI do not distinguish between merit and demerit goods, these national income statistics only focus on the final value of the output.
- Therefore, an economy producing education and libraries (merit goods) may have lower GDP than an economy producing military weapons (demerit goods).
- GDP/GNI do not measure improvements in education, health, and life expectancy.
- GDP/GNI do not measure the distribution of the output/income across the population:
- An economy where all output or income is owned by a single individual may have the same GDP or GNI per capita as an economy where income is evenly distributed among the population..
GDP growth not reflecting improvements in economic well-being: Saudi Arabia
Where: Saudi Arabia
When: Ongoing (since the discovery of oil in the 20th century)
What: Saudi Arabia has one of the highest GDPs in the Middle East, driven primarily by oil production and exports, which make up a significant portion of its output.
Why: The reliance on oil production creates a high GDP, but this does not fully reflect the well-being of the population. Despite its wealth, Saudi Arabia has faced challenges related to income inequality, reliance on non-renewable resources, and limited investment in sectors like education and healthcare (historically).
How: Saudi Arabia's economy remains heavily dependent on oil revenues, meaning much of the wealth is concentrated in a few hands or specific industries, while economic diversification is still a work in progress.
So?: The high GDP of Saudi Arabia does not necessarily translate to improved economic well-being for all citizens. It illustrates how GDP fails to measure the composition of output, improvements in health or education, or the distribution of income. For example, investments in oil infrastructure inflate GDP, but this doesn't guarantee better life expectancy or equitable income distribution. This example highlights how GDP can misrepresent broader measures of societal progress and well-being.
GDP/GNI are not always accurate in making comparisons over time
Using per capita values
- Population size changes over time.
- Using per capita values allows to account for the population growth.
- This yields accurate measures of economic growth in an economy.
GDP growth and GDP growth per capita: Singapore
Who/Where: Singapore
When: 1960s to present
What: Singapore’s GDP per capita has grown significantly due to rapid industrialization, trade openness, and investment in education and infrastructure.
Why: Despite being a small island nation with limited natural resources, Singapore maintained a stable population size while achieving consistent GDP growth. As a result, GDP per capita surged from around \$500 in the 1960s to over \$70,000 in 2023. This reflects not only economic expansion but also rising individual living standards.
So?: Demonstrates how focusing on GDP per capita provides a clearer measure of economic growth and improvements in quality of life. Unlike countries with high population growth, Singapore’s consistent rise in GDP per capita aligns closely with its enhanced economic prosperity and standard of living.
GDP growth without GDP growth per capita: India
Who/Where: India
When: 2000s to present
What: India’s GDP has grown significantly due to economic reforms, technological advancement, and global trade. However, its rapidly growing population has impacted GDP per capita.
Why: While the economy expanded, the population surged from around 1 billion in 2000 to over 1.4 billion in 2023. This high population growth diluted the impact of GDP growth on individual living standards, slowing the increase in GDP per capita.
So?: Highlights that while GDP shows strong economic expansion, GDP per capita provides a more accurate picture of individual prosperity. India's case underscores the importance of adjusting for population size when comparing economic progress over time or across countries.
Varying the GDP/GNI components
- In previous sections we saw that both GDP and GNI are often measured through the expenditure approach, adding up the contributions of each component. Hence:
- $$GDP=C+I+G+(X−M)$$
- $$GNI = GDP + Net\ Factor\ Income\ from\ Abroad$$
- However, what is included in each component may change over time.
- This may cause sudden changes to the GDP/GNI values.
Altering the GDP components: USA
Where: United States
When: 2013
What: Revised the calculation of GDP to include artistic development and research and development (R&D) as part of the "investment" component.
Why: Following the 2008 System of National Accounts (SNA) revision, the United States adjusted its GDP calculation to align with global standards. This ensured consistency in reporting GDP figures with other economies.
How: The U.S. implemented these changes by including previously excluded industries like arts and R&D into the GDP calculation.
So?: This revision significantly increased GDP figures, not due to new economic activity but because previously unaccounted contributions were added. Comparing GDP figures before and after 2013 is unreliable, as the rise reflects a change in accounting methodology rather than actual economic growth. It highlights the limitations of GDP in comparing economic output across time when statistical methods evolve.
GDP/GNI are not always accurate in making comparisons between countries
Using per capita values
- Population size changes between countries.
- Using per capita values allows to account for the population differences.
- This allows to make meaningful comparisons of economic activity between economies.
GDP and GDP per capita: India and Luxembourg
Where: India and Luxembourg
When: 2022
What: India’s total GDP in 2022 was approximately $3.73 trillion, making it one of the largest economies in the world. Luxembourg, on the other hand, had a much smaller total GDP of about $88 billion. However, when comparing GDP per capita, Luxembourg far surpasses India. In 2022, India’s GDP per capita was approximately $2,600, while Luxembourg’s GDP per capita was an impressive $136,000.
Why: India’s GDP is driven by its large population of over 1.4 billion people, where economic output is spread across a vast number of individuals. Luxembourg, with a population of just over 650,000 people, benefits from advanced financial services and a high-income economy, leading to its extraordinarily high GDP per capita.
So?: This case illustrates why GDP per capita is crucial for comparisons. While India’s total GDP suggests it is economically powerful, GDP per capita highlights the significant disparity in average income and living standards. Luxembourg’s smaller population combined with its high economic output per individual provides a better reflection of its citizens’ prosperity.
Accounting for non-marketed output and the underground economy
- GDP/GNI do not include non-marketed output (self-grown agricultural goods, volunteer work, self-built houses...).
- GDP/GNI do not include the output sold in underground markets (illegal drugs, smuggled goods, off-the-books labour, unregistered sales...).
- Different countries have greater unaccounted amounts of their real output.
- This may result in misleading comparisons between countries' economies based on their GDP/GNI, even when taking per capita values.
Differences in the informal economy: India and USA
Where: India and the United States
When: 2022
What: In 2022, India’s GDP was approximately $3.73 trillion, while the United States had a GDP of about $25 trillion. However, India’s economy has a significant informal sector that is not captured in official GDP statistics. According to estimates, India’s informal economy accounts for nearly 50% of its total GDP, including self-employed individuals, small-scale agricultural production, and off-the-books labor. In contrast, the United States has a much smaller informal economy, estimated at around 8-10% of GDP, with most economic activities being formal and well-documented.
Why: India’s large informal sector includes self-grown agricultural goods, informal street vendors, and unregistered small businesses. These activities contribute to real economic output but are not recorded in official GDP figures. Similarly, the underground economy in India, such as black-market transactions and unregistered labor, accounts for a larger portion of economic activity compared to the United States, where stricter tax enforcement and regulations limit such practices.
So?: This case highlights why GDP alone can be misleading for cross-country comparisons. India’s official GDP underestimates the actual economic output due to its substantial informal and underground economy. On the other hand, the United States’ GDP more accurately reflects its economic activity because of comprehensive data collection and enforcement. Adjusting for unaccounted activities would show India’s economy to be relatively larger than GDP figures suggest, especially when considering per capita comparisons.
