Meaning of Gross Domestic Product

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24 February 2011

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Measuring Well-being

Economists put great store by certain numbers

and few are more important than Gross Domestic Product; but this may be delivering a distorted picture

The traditional measure of economic well-being is annual Gross Domestic Product (GDP), the total value of all the goods and services produced in an economy in one year.

If the GDP number is divided by a nation’s population an even more meaningful measurement is achieved, called GDP per capita – the average amount of each citizen’s share of the country’s wealth. If per capita GDP is high and keeps getting higher everybody is happy. At least, that’s the theory.

GDP Numbers

Hide Inequality

However, using GDP as a measurement can be a bit misleading. Brunei is a tiny country in Asia whose 388,000 people enjoyed an annual per capita GDP of $50,300 in 2010, according to the CIA Factbook. This gives the country a ranking of ninth place in the world on a GDP per capita basis.

BBC News reports (January 2011) that “thanks to its large reserves of oil and gas, (Brunei) now has one of the highest standards of living in the world. Its ruling royals, led by the head of state Sultan Hassanal Bolkiah, possess a huge private fortune.”

Sultan of Brunei’s Immense Fortune

Sultan Hassanal Bolkiah has ruled the country by decree since 1962. With a slight nod to democracy he appointed a parliament in 2004.

The Sultan doesn’t file an income tax return so it’s not known what his annual income is, but it’s safe to say it’s more than the national average for Brunei. Forbes.com (June 17, 2009) lists Sultan Bolkiah as the world’s fourth richest royal personage, with a net worth estimated at $20 billion.

Many of the extravagances of the Sultan’s life are detailed in an article in The Daily Mirror (October 26, 2007). Some details were revealed in a court case in London, England: Hassanal Bolkiah paid £1.26 million to his badminton coach, and £1.25m for acupuncture and massage.

“He even spent nearly £50,000 on guards for his collection of exotic birds.

“But, by the standards of the Sultan’s staff, that’s practically minimum wage. His five-strong PR team collected a total of £29.3m. And two housekeepers were each paid around £7m.”

Ctsnow

Sultan of Brunei’s barge and palace

Gap between the Rich and the Very Rich

As the Sultan enjoys the luxury of his home, with 1,788 rooms and a garage that contains many of the more than 2,000 luxury limousines he has bought since 1984, some economists point out that his vast wealth compared to the merely comfortable status of the rest of the country gives a distorted picture.

But, with one person scooping up what is probably about 25 percent of the nation’s wealth, the GDP per capita figure is meaningless. The same gap between a few fabulously rich people and the masses of people struggling to get by can be seen in most developing countries. It’s even evident in many developed nations.

The Economic Index of Well-Being

That’s why some economists are developing other ways of measuring well being. At Canada’s Centre for the Study of Living Standards they’ve developed something called The Economic Index of Well-Being.

Economists Lars Osberg and Andrew Sharpe have figured out a way to assign values to such things as the rich/poor gap and job security.

By measuring GDP, Canada performed well during the 1990s with an accumulated increase of 42.5 percent during the decade. The Economic Index of Well-Being tells a different story. Because of cuts to social programs, inflation, and greater job insecurity, most Canadians are worse off than they were in 1970.

Genuine Progress Indicator

Meanwhile, others have developed what is called the Genuine Progress Indicator (GPI). It is based on the belief “that if policymakers measure what really matters to people - health care, safety, a clean environment, and other indicators of well-being - economic policy would naturally shift towards sustainability.”

The GPI factors in the impact to the environment of economic growth. The cost of cleaning up a spill of toxic waste would actually add to a nation’s Gross Domestic Product; the GPI would count this as a negative. Cutting down the Amazon rainforest creates wealth in Brazil by traditional economic measures. The GPI sees this as destruction of a natural resource and therefore as a cost, not a benefit.

Sources

CIA 2010 World Factbook

“Brunei: Country Profile.” BBC News, January 27, 2011.

“The Man who Pays his Cleaner £7m.” Beth Neil and Gary Anderson, Daily Mirror, October 26, 2007.

ECONOMIC WELL-BEING RANKING 2007

1. Norway

2. Denmark

3. Netherlands

4. Belgium

5. Sweden

6. France

7. Germany

8. Finland

9. Canada

10. United Kingdom

11. Australia

12. Italy

13. United States

14. Spain

COUNTRIES RANKED

BY GDP PER CAPITA

2010

1. Qatar - $145,300

2. Liechtenstein - $122,210

3. Luxembourg - $81,800

4. Bermuda - $69,900

5. Singapore - $62,200

6. Norway - $59,100

7. Jersey - $57,000

8. Kuwait - $51,700

9. Brunei - $50,300

10. United States - $47,400

17. Canada - $39,600

CIA World Factbook

THE HAPPY

PLANET INDEX

2009

The Happy Planet Index has been produced by the New Economics Foundation. It measures human well-being and environmental sustainability.

As can be seen only Brazil among the world’s biggest economies ranks highly.

1. Costa Rica

2. Dominican Republic

3. Jamaica

4. Guatemala

5. Vietnam

6. Colombia

7. Cuba

8. El Salvador

9. Brazil

10. Honduras

89. Canada