Measuring Prosperity

Roger Bate of AEI has just published a new Development Policy Outlook. He discusses the very interesting question of how economists (and others) think about measuring prosperity.

Economists typically look to Gross Domestic Product, GDP, as a measure of how well or poorly a country is doing. But GDP measures the total value of goods and services produced in a country. Tallying the value of the stuff and the services the people within a country produce in a given year gives us some sense of what life is like in that place, but GDP is criticized as failing to capture important variables or values that enhance our lives. It is sometimes difficult for GDP to adequately account for changes in product quality or the value of certain unpriced amenities. For example, it doesn't really capture the sense of delight we have from being able to listen to hundreds of radio stations on-line or the value we attach to having a pristine wilderness area.

Part of the problem here is, of course, the subjective nature of the valuation of these kinds of things. I might really love the wilderness area; you might not care about that much at all, but love the idea of being able to listen to reggae whenever/wherever. The benefit of GDP is that it measures values that are captured in a reasonably objective form, i.e. market prices. The limitation is that it measures things in their money prices. If something doesn't have a money price it's tough to capture.

Roger's piece takes issue with a recent report by the French Commission on the Measurement of Economic and Social Progress and compares this report with the Legatum Institute's 2009 Prosperity Index.

Here's an excerpt:

"One of the most interesting, if unsurprising, findings of the Prosperity Index is that higher-income countries have diminishing returns to life satisfaction. . .this means that if you live in one of the poorest nations on earth, an increase in income is vitally important to improved prosperity, so driving growth is a critical ambition for those living in such regions. . .If the laws and norms of a country do not support entrepreneurial activity, growth will not occur."

So true.

- Karol

Photo is of Ane Muandahiro, 50, a master weaver at Covanya.