The Limits of GDP

In an Op-Ed piece by Michael Porter in the Boston Globe, he comments on how GDP is not the best way to quantify national success.

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The Gross Domestic Product (GDP) was developed by economist Simon Kuznets and is a measure of a country's national income that represents economic assets.  GDP growth became a measure of national progress but it has increasingly come under question whether GDP is sufficient measure.

Even Kuznets commented in 1934 that the welfare of nation cannot be measured just by a measurement of national income.  Our standard of living includes other factors including social, environmental and community assets.  Happiness goes beyond wealth and includes: health, access to knowledge, tolerant communities and opportunities for personal achievement.

To try and include these other factors into a new metric, Porter has developed what he terms the Social Progress Index (SPI)which measures social progress in three broad areas: basic human needs, foundations of wellbeing and opportunities for an individual to reach their full potential.  The goal of the SPI is to "capture the breadth of issues that constitute wellbeing and identify priority areas for improvement."

The SPI helps measure social outcomes separate from economic indicators and allows a comparison of per capita GDP to social progress.  In general, economic growth correlates to improved social progress but some nations are shown to achieve higher social progress with similar GDPs.  Porter provides the example of Costa Rica having greater social progress as compared to South Africa.

By measuring the right thing, we can work towards improving national wellbeing and the development of the SPI allows a better measure than the GDP.

Hopefully this measure will be more broadly used by all those in a position to make decisions that affect our lives.