TI Discussion Paper No. 07-019/3
27 Pages Posted: 9 Feb 2007
Date Written: February 2007
Expectations and information about the growth of GDP per capita have a large influence on decisions made by private and public economic agents. It will be argued here that GDP (per capita) is far from a robust indicator of social welfare, and that its use as such must be regarded as a serious form of market and government failure. This article presents an update on the most important criticisms of GDP as an indicator of social welfare and economic progress. It further examines the nature and extent of the impact of GDP information on the economy, revisits the customary arguments in favour of the GDP indicator, and critically evaluates proposed alternatives to GDP. The main conclusion is that it is rational to dismiss GDP as an indicator to monitor economic progress and to guide public policy. As is clarified, this conclusion does not imply a plea against growth, innovation or national accounting.
Keywords: Distribution, externalities, genuine savings, happiness, HDI, informal sector, ISEW, status goods
JEL Classification: D31, D63, E01, I31, O15
Suggested Citation: Suggested Citation