Is GDP really the one-size-fits-all economic statistic that we thought?
By Owen Kamphuis
web posted October 28, 2024
In his article, "Why the world's richest countries are not all rich," the 2015 Nobel Prize Winner in Economics, Angus Deaton, argues that GDP is not a suitable measurement for understanding how well the economy of a country is performing. First, he believes that the release of economic data receives too little attention from the media. He explains that measures of economic activity usually do not receive much coverage unless they directly affect other parts of life, such as health. Although he doesn't make the connection, his point is proven by the fact that economic indicators, especially GDP, are often mentioned by media outlets not when they are released, but when they connect to a story. This means that economic indicators are often only used when news outlets think that they fit with the coverage. When news outlets to mention economic indicators, they often choose GDP. However, Angus Deaton shows how GDP is a useful but incomplete statistic.
Gross Domestic Product, commonly referred to as GDP, is the total value of all goods and services produces in a country during a given year. It is often calculated using the equation: GDP = private consumption + private investment +government spending + (exports minus imports). Gross Domestic Product is supposed to measure the performance of an economy; however, it has some faults to it. As Angus Deaton argues, sometimes GDP is not the right statistic to use. He advocates for more consideration of the per capita disposable income, which shows how much income households have to spend after deducting taxes.
In 2020, when Angus Deaton wrote his article, the world's richest countries, as measured by per capita GDP, were: Luxembourg, Qatar, Singapore, Ireland, Bermuda, Cayman Islands, Switzerland, UAE, Norway, Brunei, the US and Hong Kong. Deaton comments on the fact that 11 of these 12 countries are resource-based economies (Qatar, Norway) or investment hubs (Luxembourg, Singapore, Ireland, Bermuda, Cayman Islands, Switzerland, Brunei, Hong Kong). The UAE falls under both categories; and only the US does not fit almost entirely into these types of economies. This list is not exclusively the countries in the world where the highest living standards are. So there must be another reason why their GDP is so high.
Deaton chooses Ireland as an example of GDP not completely accurately showing the economy's wellbeing. He accurately shows how Irish GDP does not reflect actual living standards by showing the growth rate of both statistics. In 2015, the Irish GDP grew by 26% in one year, whereas the per capita disposable income grew 4.6% in that year, clearly much less. Interestingly, although Ireland's GDP per capita may have grown at much higher rates than its per capita disposable income, this may not signify a failure on the part of the Irish government. It may actually show a strength. Ireland purposefully set the lowest taxes on foreign corporations in Europe, which led companies such as Apple, Google, Facebook, Airbnb, PayPal, Microsoft, and eBay to establish their European headquarters in the country.
While these companies' profits do not stay in Ireland, the Irish government clearly hopes that these firms will hire Irish workers and spend some of their profits in the country. However, the profits that leave the country still count in Ireland's GDP. This is why Angus Deaton argues that Gross National Income (GNI) more accurately represents the wealth of a nation. Gross National Income represents the income of people and businesses from a certain country. This shows the wealth actually owned by citizens of a country but excludes foreign firms' profits that leave the country. While GDP remains an essential measurement, it should not be used as a one-size-fits-all statistic. Sometimes, Per Capita Disposable Income or Gross National Product better fits the situation. Most dangerous is when policymakers make decisions only informed by GDP and not using other relevant statistics. 
Owen Kamphuis is an AP Economics student. © 2024 Owen Kamphuis
