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August 27, 2010
Yardsticks: GDP, Gini, and HDI
By: Cindy Ivanac-Lillig
I often begin professional development sessions with the question: “How do we know how our economy is doing?” GDP, those in the room quickly respond. And then we move on to discuss why, despite some weaknesses, Gross Domestic Product is one of the most reliable measures of how we are doing. No one will probably argue with this, but does anyone wonder what other yardsticks are available out there?
In these sessions, I go on to ask participants to think about real GDP growth not as more money, but rather as more goods and services. Real GDP strips out price inflation in an attempt to capture the real growth of the economy as opposed to the growth in prices. Sounds pretty good so far, but am I just splitting hairs? Assuming inflation is low, whether or not my participants are thinking about goods and services or money, I am ultimately making a subtle argument that more of either means that we are better off. It is true that higher GDP generally corresponds well to higher living standards, but the relationship is not always clear, and in tough economic times it is less clear. In this light, I thought it would be helpful to revisit some other measures that get at long-term growth in living standards and well-being -- because isn’t that what we all are ultimately interested in measuring.
The first, an offshoot of GDP, is per capita GDP. As it states, this measure basically divides GDP by the population number to give a feel for how big a slice of the GDP pie could go to each person. U.S. GDP per capita is roughly $46,000 according to the CIA Factbook and ranks us about #11 in the world (even though in overall GDP, we rank #1). This figure also provides a more logical way to compare GDP across countries. For example, China has the second-highest GDP, but its per capita GDP is less than $7,000. When you consider this, it is easier to understand why there are such different economic outlooks for China relative to the U.S.
The second and rather corollary measurement that I find interesting is the Gini coefficient, which measures how evenly distributed our income is among our population. According to the CIA Factbook, we rank approximately #93, just behind Cameroon, in terms of income distribution. In fact our Gini coefficient has risen from 1997 to 2007, meaning we are distributing income less equally than we were a decade ago.
And finally, there is the human development index (HDI), compiled by the United Nations Development Program (UNDP). According to the UNDP, we rank #13 in the world. One major subset of the HDI is purchasing power; the other two are the ability to receive an education and the ability to live a long and healthy life.
Different yardsticks measure progress differently. They provide interesting context for one another. The Gini coefficient and HDI have a whole host of data integrity issues, but they do help point out how the average person may be doing and not just leave it to assumption that if the whole is growing, everyone must be doing better. GDP is still probably the most accurate way to capture “how we are doing” in frequent intervals of time, with fairly complete, inexpensive, and reliable data, but it is certainly not the only way.
What do you think?
Posted by Cindy at August 27, 2010 10:44 PM
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GPI: The Genuine Progress Indicator compiled by a California based nonprofit called Redefining Progress compares GDP to GPI by highlighting issues such as pollution, income distribution, crime and family erosion as well as the work done in households and through community volunteerism. This indicator enhances the understanding of living standards. I agree with you that any discussion of standard of living should include the GINI coefficient and the UN's HDI.
Posted by: Amy at October 21, 2010 3:30 PM
Thanks Amy -- I hadn't heard of GPI. I will check it out.
Posted by: Cindy at October 22, 2010 3:46 PM
I'd be curious to see the rate of change of GDP coorelated to GINI index. Because one of the arguments made is that the wealthy invest more and there for GDP goes up.
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