GDP and the Measurement of Progress
Posted by Robert Whaples on November 3, 2009
On Friday and Monday I covered Cowen and Tabarrok’s first macroeconomic chapter, “GDP and the Measurement of Progress” — which is another excellent effort. It opens with a table giving GDP and GDP/capita in the 15 largest economies in the world. (Why do other intro textbooks usually give GDP statistics for only the U.S.?) Then it clearly defines and explains GDP by spending a paragraph or two on each word/phrase in the definition — “GDP is the market value … of all final … goods and services … produced … within a county … in a year.” (My students nailed the definition word for word on their quizzes taken before I covered the topic in class.) Next come a clear discussion of nominal vs. real and statistics plus a map showing real GDP growth rates over time and space. Like other textbooks, C&T trades in the old “back to back quarters of falling GDP” definition of a recession for the NBER’s lengthier definition. Rather than giving a circular flow diagram, however, C&T discusses “The Many Ways of Splitting GDP” — examining the expenditure side (C + I + G + NX) and the factor income approach. Here my students didn’t do so well. Even though I gave them a circular flow diagram handout and replicated it on the board, they bombed the part of yesterday’s quiz that gave them information on C, I, G, X, M, and net taxes and asked them to find GDP, total expenditures and total income, because (despite my explanation in class) they forgot that GDP equals total expenditures and also equals total income.
The chapter closes with a thoughtful discussion of “Problems with GDP as a Measure of Output and Welfare.” I used this material as a springboard for a discussion of the growing literature on the economics of happiness — do higher/rising levels of GDP per capita actually make people happier? (Short answer: “yes.” Long answer: “It’s complicated.”) I put together a sheet of correlates of GDP/capita at the national level from the Gallup World Poll (2007). Respondents were asked “did you experience __________ (during a lot of the day) yesterday?” What does higher income buy us and/or free us from? The correlates of GDP per capita are given below.
I closed yesterday’s discussion by asking whether rising/higher GDP per capita and/or personal income is correlated with eternal happiness. Of course I don’t know the answer to this one for sure, but Proverbs 30:8-9, which I quoted in class, says: “Give me neither poverty nor riches; (provide me only with the food I need Lest being full, I deny you, saying, ‘Who is the LORD?’ Or, being in want, I steal, and profane the name of my God.” When we go to meet our maker, will HE say, “Oh well, you earned a hell of a lot down on earth and you were quite productive, so I guess you deserve heaven”? The final handout of Monday’s class was from a Pew Research Center survey comparing the percent of the population in over 40 countries who say that religion is very important to them vs. GDP/capita — the correlation is distinctly and strongly negative, as Proverbs would suggest.
Final note: I’ve created a Sporcle quiz for my students on “Famous Economists.” Feel free to test yourself at http://www.sporcle.com/games/DeaconEcon/famous_economists.
Correlates of GDP per capita at the National Level
|Good Tasting Food||0.60|
|Treated with respect||0.44|
|Pleased with accomplishments||0.28|
|Smile/laugh a lot||0.27|
|Pride because someone complimented you||0.27|
|Ability to choose how to spend time||0.20|
|On top of the world/life is wonderful||0.18|
|Things are going my way||0.12|
|Learned something interesting||0.00|
|Pride in something you did||0.00|
|Excitement/interest in something||-0.10|
|Upset over criticism||-0.25|
Source: Betsey Stevenson and Justin Wolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox,” NBER Working Paper 14282