GDP is a closely watched indicator of the current health of the economy and an important tool of economic policy. It has been called one of the great inventions of the 20th century. It is not, however, a persuasive indicator of individual well-being or economic progress. There have been calls to refocus or replace GDP with a metric that better reflects the welfare dimension. In response, the U.S. agency responsible for the GDP accounts recently launched the GDP and Beyond program. This is by no means an easy undertaking, given the subjective and idiosyncratic nature of much of individual well-being. This paper joins the Beyond GDP effort by extending the standard utility maximization model of economic theory, using an expenditure function approach to include those non-GDP sources of well-being for which a monetary value can be established. We term our new measure expanded GDP (EGDP). A welfare-adjusted stock of wealth is also derived using the same general approach used to obtain EGDP. This stock is useful for issues involving the sustainability of well-being over time. One of the implications of this dichotomy is that conventional cost-based wealth may increase over a period of time, while welfare-corrected wealth may show a decrease (due, for example, to strongly negative environmental externalities).View the Full Working Paper
Is GDP Becoming Obsolete? The “Beyond GDP” Debate
WP 22-37 – Real GDP falls short in quantifying the economic well-being of a nation. We discuss how far we can expand it to include new well-being impacts like the rise of the Internet and climate change. Not all of well-being is quantifiable.