Wednesday, April 23, 2008

GDP is not everything

Too often, policy or discourse is focussed on GDP. But GDP hides a lot of things about the economy, in particular how it is distributed across its population. Is an economy with a higher per capita GDP necessarily better off than one with a lower GDP per capita but more even distribution?

Of course, an uneven distribution of income can be the consequence of individual choices. What really matters in the equality of opportunities, what Amartya Sen termed capabilities. The problem is to find a good measure for this. The Human Development Index is one way to approach this, but it looks only at proxies for equal opportunities like elementary education, and some basic health measures.

John Roemer has a suggestion that gets closer to opportunities: "Inequality of opportunity is the inequality between the different distribution functions of income of the various types, as opposed to the inequality within these distributions, which is attributed to differential effort."

Using this measure, he finds that 1% inequality of income is attributable to inequality of opportunities in Scandinavia, 7% in Southern Europe, and 30% in developing countries.

1 comment:

Anonymous said...

For one, almost all modern macro models do not maximize GDP, but some welfare measure typically based on utlity discounted over several periods. And utility is based on consumption, leisure, at least.

But it is true that these models do not really focus on the lower end of the distribution, in a Rawlsian sense.