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>GDP Notes Cut and Paste Green/Maryland GDP Paradox and link

>GDP Critisisms.

http://www.green.maryland.gov/mdgpi/pdfs/GDP%20Paradox.pdf

2.1. Principles of proper accounting
The use and calculation of the GDP indicator is inconsistent with two principles of good bookkeeping: (i) divide clearly
between costs and benefits; and (ii) correct for changes in stocks and supplies. GDP really represents an estimate of the costs
instead of the benefits of all market-related economic activities in a country. In addition, GDP does not capture all social costs
as it omits external costs.
3
It is well-known that the GDP indicator was never developed for the purpose of welfare measurement. In 1665 Sir William Petty produced the first esti

one extrapolates a constant tempo of real GDP growth towards the distant future, it is evident that any correlation with social welfare will be lost somewhere along the way. To illustrate this, note that extrapolation
of a 2% yearly growth rate 1000 years into the future would result in a GDP that is (1.02)
1000
# 400 million times the current
GDP. It is difficult to imagine that individual or social welfare could increase to such an extent. This suggests that if there is a
positive (average) correlation between GDP and social welfare, it should be very close to zero.

Lexicographic preferences
Basic needs like water, food, shelter, company, respect and freedom cannot be traded off against luxury services and
material goods.

2.7. Environmental externalities and depletion of natural resources
An important subcategory of unpriced effects relates to use of natural resources and the environment. This involves negative external effects as well as goods and services delivered by nature

3. How serious is the influence of GDP information on the economy?
In the first place, one wonders why governments invest structurally in calculating and predicting GDP. This investment is
shared by all countries, and since the GDP is standardized through the United Nations System of National Accounts, it allows
for an international comparison of countries in GDP terms
The importance of GDP information for firms, investors and citizens/consumers is illustrated
by the media – television, radio, newspapers, financial and other magazines, and internet – informing us on a daily basis
about the status of our national GDP, both over time and in comparison with other countries. To illustrate the widespread
influence of GDP, note that a search on internet on July 7th 2008 for ‘‘GDP” delivered 44,700,000 hits (and ‘‘Gross domestic
product” 4,970,000 more). This is, for example, more than five times the number of hits for ‘‘social welfare”, viz. 8,470,000

A recent indirect but important effect of GDP information relates to climate policy. Among the most influential climate
policy studies are economic analyses in which the policy cost is expressed in terms of a reduced rate of GDP growth (an early
study is Nordhaus, 1991; for an overview see Tol, 2008; and for a critical evaluation Söderholm, 2007). This type of research
has received much attention from policy makers, notably since it was widely diffused through reports of the IPCC (Intergov-
120 J.C.J.M. van den Bergh / Journal of Economic Psychology 30 (2009) 117–135ernmental Panel on Climate Change). In fact, in deciding to not ratify the Kyoto Protocol, the Bush administration referred to
Nordhaus’ work as providing an important motivation.

This is not the end of the story. Through pessimistic (optimistic) responses by individuals, firms, and governments to forecasts of a low (high) rate of GDP growth, GDP information creates a pro-cyclic effect. This resembles the way in which behaviour in financial markets is steered by perceptions, leading to herd behaviour which causes expectations to become tru
: GDP not only is an inadequate proxy of social welfare but also has a considerable impact on public and private
economic decisions. By implication, GDP represents a serious information failure.
Conceptual
simplification of choices is not an unusual strategy followed by humans, and has been well documented in the literature
on behavioural economics. For example, human choice is often in accordance with the ‘isolation effect’, which represents
a simplifying approach to compare the performance of complex alternatives (Kahneman & Tversky, 1979).
In addition, conformism, docility, socialization and imitation can explain why GDP is without much criticism accepted by
the majority of citizens and economic students alike.

r, Colander (2005, p. 175) notes: ‘‘Individuals are not born as economists; they are molded through formal
and informal training. This training shapes the way they approach problems, process information and carry out research,
which in turn influences the policies they favour and the role they play in society. [
Only in the very last pages (pp. 508–510) a
box is presented as a kind of afterthought, in which the question is addressed: ‘‘Will growth make us happy”. The answer
given is twofold: ‘‘Income is not the only determinant of happiness, but clearly happiness rises with income …” and ‘‘Thus,
although growth will not make us as happy as we expect it to, it will still make us happier than we would be if there were no
growth”. Neither statement is convincingly supported with data, arguments or studies. Nor are the fundamental criticisms
summarized in Section 2 being addressed

In fact, one can come up with another
set of quality-of-life indicators, such as pollution, living space, serenity, direct access to nature, congestion and work stress,
with which GDP per capita correlates negatively in certain income ranges. Third, correlation does not guarantee causality.
Although liberty, health and literacy often will act as necessary conditions for sustained GDP growth they do not necessarily
improve by continued growth beyond a certain income level
These various counter-arguments are supported by an extensive empirical study by Easterly (1999). It uses a panel dataset of 81 indicators covering up to four time periods (1960, 1970,
1980, and 1990) and seven areas: (1) individual rights and democracy, (2) political instability and war, (3) education, (4)
health, (5) transport and communications, (6) inequality across class and gender, and (7) ‘‘bads”. Depending on the statistical
method used, it is found that income per capita has an impact on the quality of life that is significantly positive for only 32,
10 or 6 out of 81 indicators. The author concludes that the results can be partly explained by long and variable delays between growth and changes in the quality of life, and that for many quality-of-life indicators global socioeconomic progress
(–growth) is more important than home–country growth

, Pissarides, 2000). Further, GDP growth does not necessarily reduce unemployment for several other
reasons: it may involve outsourcing associated with retaining much of GDP domestically while moving jobs to elsewhere;
and growth often goes along with creative destruction, i.e. disruption of old economic activities, which in turn implies (temporary) unemployment in specific sectors or job types. Of course, employment in combination with wages or productivity
will affect the GDP, suggesting the relevance of a reverse causality (and correlation at times).
Another often expressed view is that GDP provides a basis for estimating tax revenues. This might then allow one to forecast taxes, to evaluate creditworthiness in the case of providing loans to countries (as done by the IMF and the World Bank),
or to determine fair financial contributions of member states to a federation of states (e.g., USA, EU). In this case, GDP does
not function as a performance indicator but more modestly as a model variable.
8
s (de Bruyn & Heintz, 1999; Stern, Common, & Barbier,
1996). What comes out of these studies is that nearby problems relating to human health, like local water and air pollution,
are solved if income rises, but that many other environmental problems are not solved or at best shifted in space (e.g., export
of solid waste, incineration) or time (e.g., landfills). In general, it is therefore not true that economic growth solves environmental problems. This means that GDP information is not as relevant to understand the dynamics of solutions to environmental problems as was initially believed.

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