In this piece, Dr Ed Jones, Senior Lecturer in Economics at Bangor University, makes the case for using more holistic metrics to assess prosperity and wellbeing beyond GDP.
What we measure, matters.
What we measure matters as it informs the decisions made by governments and the choices people make. To measure what is important we need to look beyond GDP and embrace more holistic metrics to assess prosperity and wellbeing.
The ambitious target of growing GDP per person.
The Labour Party made boosting economic growth a central part of its manifesto during the 2024 general election. Specifically, Labour set out an ambition for the UK to have the highest growth in Gross Domestic Product (GDP) per person among the G7 group of major economies over consecutive years by the end of the current parliament. It is widely believed that GDP growth, or simply economic growth, is a vital sign of a nation’s health, reflecting improvements in living standards and the capacity to provide better opportunities for its citizens.
The Labour party’s emphasis on growing the economy is understandable since the UK’s GDP per capita (GDP after adjusting for changes in population) over the last 10 years increased by an average of less than 1% per annum. This was a fraction of growth rates in the post-second world war “golden age”, and, excluding the two world wars and their immediate aftermaths, close to the lowest rate since the “long depression” of the 1870s.
GDP is a useful economic tool, but it fails to capture important aspect of societal welfare.
Since its inception in 1934, GDP has been the preferred way to measure the success and prosperity of a country. GDP is the total value of everything a country produces and sells: It’s a measurement of cold hard cash. The citizens of a country with high GDP are likely to enjoy high incomes and high standards of living and if GDP goes up a lot, people are likely to be earning and spending more and businesses are likely to be hiring and investing more. In other words, people are likely to be feeling better off. On the other hand, if GDP growth is weak or perhaps even falling, businesses are likely to be cutting jobs and people are likely to be earning and spending less, leaving them feeling worse off.
GDP is a useful economic tool, something that helps predict recessions and allows policymakers to make decisions, such as whether to lower taxes or increase government spending. But is GDP the right metric to measure the wealth and prosperity of a nation, and the welfare and wellbeing of those that live within it?
GDP fails to capture important aspects of societal welfare, for example income inequalities and climate change. A major flaw of GDP is its potential to rise despite negative outcomes from a society perspective. For example, suppose a factory pollutes toxic chemicals into a river, requiring another company’ to come and clean it up. Both – the output of the factory and activities of cleaning the river – will contribute to GDP. In some cases, GDP includes goods and services that are prohibited in the countries where they are produced. For example, the UK includes certain drugs and services offered by female prostitutes only. The Office of National Statistics (ONS), the agency responsible for calculating UK GDP, stated that these illegal activities were legal in some countries and including them allowed comparable metrics.
Measuring welfare properly matters because it informs governments and societies’ choices. Economic growth remains the primary goal of most governments. While GDP reasonably measures the economy’s marketable output (important for specific policies), it’s importance should be downgraded. A greater emphasis should be placed on measures, both objective and subjective, that reflect what’s important to those living within the country.
It is possible to have metrics that assess prosperity and wellbeing.
The ideas behind ‘Beyond GDP’ have gained significant attention in recent years as a response to the limitations of using GDP as the sole measure of the success and prosperity of a country. Such initiatives are developing more holistic metrics to assess prosperity and well-being, which include environmental sustainability, social inclusion, quality of life, and intergenerational equity.
One of the key challenges in moving beyond GDP lies in the inherent subjectivity and assumptions involved in constructing these alternative indices. For instance, assessing the long-term environmental impacts of economic activities or determining the appropriate weightings for factors such as income distribution can be difficult. But there has been significant progress made by researchers and policymakers in measuring what actually makes life worthwhile. For example, the environmental and social effects of GDP growth can be estimated, as can the effects of income inequality. The psychology of human wellbeing is measurable through surveys and quantitative methods. Measuring the important aspects of life is possible.
Sustainable Development Goals (SDGs), adopted by the United Nations (UN) in 2015, defines what sustainable well-being means, how to measure it, and how to achieve it. The SDGs’ indicators cover a wide range of issues, including poverty, inequality, climate action, and sustainable consumption and production. By aligning efforts with these indicators, countries can track their contributions to global sustainability objectives and ensure a coordinated approach to addressing pressing challenges.
In her book ‘Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist’, the economist Kate Raworth gave a visual framework – a doughnut with two concentric rings – for sustainable development that balances essential human needs with planetary boundaries. The inner ring represents the social foundation, encompassing the minimum standards for a fair and just society, while the outer ring represents the ecological ceiling, beyond which lies environmental degradation and planetary boundaries. The space between these two rings is where social needs are met without exceeding ecological limits. The doughnut framework advocates for economic policies that promote thriving within this space, emphasizing regeneration, distribution, and sustainability over traditional GDP growth metrics.
What we measure matters because it guides what we do.
UK politicians and policymakers are reconsidering the economic measure they use. In his January 2024 speech, for example, the leader of Plaid Cymru Rhun ap Iorwerth outlined the need for new and ambitious targets for the Welsh economy that went beyond the traditional measures of GDP and employment. Following this, the Plaid Cymru Senedd Group commissioned academics from Bangor University to identify new economic measures that move beyond GDP and are applicable within a Welsh context.
It is often said that what you measure is what you get. To build the future we want requires that we measure what is important, and a broad suite of measures are needed to help guide government policies that work towards a sustainable and equitable country that promotes and protects communities and the environment. We need to move beyond GDP as a measure of national prosperity and embrace and prioritise new metrics that relate to the things that are an important and relevant to the life to those living within the country.
About the author
Ed Jones is a Financial Economist with professional experience in the private and public sector at senior level. He has experience in advanced analytics, financial and economic modelling, stakeholder’s engagement, technical research, and business strategy development.
Ed has a PhD (Economics) from the Centre for Banking and Financial Studies, University of Wales, Bangor, where he also holds a BA (Mathematics and Economics) degree and a Masters (Banking and Finance) degree.
Image credit: Yukon Haughton on Unsplash.