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GDP As a Growth Indicator: Keeping Truth Under Wraps?

GDP As a Growth Indicator: Keeping Truth Under Wraps?

By Kabeer Bora

Our Economy is one of the few bright spots among the sluggish economies around the world; a claim that is often supported by the inflated GDP figures, released by the Central Statistical Office (CSO) but here’s the bone of contention: Are we as a nation, are asking ourselves the right questions? Are GDP figures, the only criteria to measure a country’s economic well-being?
With the advent of global warming, wealth inequality, and the advancement of technology, GDP is struggling to accurately capture the economic vibrancy and well-being.

A New Measure

Recently, there was a new development in this over-debated topic. Two Stanford economists developed a new method of measuring the economic well-being of a nation. They took an individualistic approach of calculating economic well-being by including data on consumption, leisure, inequality, and mortality.

United Nations uses the Human Development Index – (HDI) which ranks nations based on similar parameters where each nation is ranked on a scale of 1 to 10. Following that, the index is calculated. However, metric calculations offered by the economists use the ‘utility method’. This, according to the authors, allows the metric to be used for different time periods; while HDI in this regard is at a disadvantage.

HDI has been criticised by a few top economists as being arbitrary and unreasonable. And that’s what the two economists look to accomplish with the new measure of economic well-being. An orthodox utilitarian method of measuring well-being to bridge the gap between economic well-being and the statistical data CSO possesses.

Measuring Well-Being Using Social Indicators

The authors, in their paper, in the American Economic Review, give an example of how better ‘social’ indicators give a higher value on their metric. France lags behind the USA on consumption: it’s nearly 60% of USA’s consumption. However on their metric, due to attention being paid to the indicators such as literacy, mortality etc. – the figure comes to around 92% of USA’s value. In a nutshell, their metric gives more weight to indicators that an individual would associate themselves with rather than just the GDP.

The paper in its general finding on the Indian Subcontinent shows that due to a huge disparity in wealth and low life expectancy, the welfare quotient decreased by at least 15 to 50%. What seems to be a matter of concern is the fact that the inequality in welfare, in the emerging markets, is higher than the inequality in incomes.

In a country, where politicians leap quickly to recent GDP figures to lend credibility to their economic policies, we should be introducing a metric robust, enough to disclose the welfare inequality in our nation.

This brings me to an important point. In a country, where politicians leap quickly to recent GDP figures to lend credibility to their economic policies, we should be introducing a metric robust, enough to disclose the welfare inequality in our nation. For instance, the states in our country can give an idea as to what exactly the GDP figures manage to conceal in its efforts to convey the economic well-being of our people.

Kerala Model V/s Gujarat Model

Kerala and Gujarat models of development are often compared with each other by citing GDP figures. This is clearly a non-starter, as they should be judged on more parameters than the opaque GDP per capita indicator. According to the 2014 data, Gujarat pips Kerala in the GDP per capita standings.

However, if one were to take into account the ‘social’ indicators of Kerala like the ones made use of by the Stanford economists, Kerala could have a higher metric value as a result of a higher life expectancy, lower mortality, and higher literacy.

GDP shouldn't be the sole criteria for the evaluation of economic growth.

Literacy rate in Kerala is higher than that in Gujarat |Photo Courtesy: Pixabay

The Need for Economic Literacy

India is a low-income nation and the wealth inequality is unrivalled. In a new study, by New World Wealth, India is only behind Russia in wealth inequality. Shouldn’t we then be holding the government responsible for such a skewed form of development? More importantly, shouldn’t we be asking for a measure that accurately captures the living standards of the populace to hold the government accountable? The onus lies not just on the government but on the people as well. Some amount of economic literacy is what would be expected at the same time from the people.

One might argue that GDP is an easier and a cheaper way of calculating economic well-being while the new metric by virtue of having more variables is more difficult to calculate. However, that is not the case. The study used data released by NSSO which uses a sample size of nearly 600,000 households has a simplistic variable called ‘Consumption-Equivalent’. Using the data they procure from the household samples, it calculates the amount of consumption required to maintain the same living standard in country B as in country A.

The Difficult Truth

GDP is prone to manipulation. Be it Pakistan, China or India, our statistical departments have manipulated the economic data time and again in order to put the ruling government in a positive light.

GDP is prone to manipulation. Be it Pakistan, China or India, our statistical departments have manipulated the economic data time and again in order to put the ruling government in a positive light. That’s when the investors and economists look at alternative data to verify the GDP stats. It might be wishful thinking but many have used alternative indicators like railway freight or electricity usage in China to determine the real growth rate. These are stats that are hard to manipulate.

At the same time, in the case of developmental economics, statistics like mortality or life expectancy or literacy are hard to manufacture when the results are for everyone to see right when you step out of your house. However, economic buoyancy is way more difficult to be observed correctly by a common man, and that is the difficult truth.


Kabeer Bora is pursuing Bachelor of Economics at the University of Auckland, NZ.

Featured Image Credits: Visual Hunt

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