How to Calculate GDP
Gross domestic product (GDP) is the monetary value of a nation’s output. Output means the value of goods and services produced over a given period both in nominal terms, but also in real or inflation-adjusted terms. GDP does not measure the number of goods and services produced, but the value of those goods and services in dollars or some other currency.
GDP cannot be observed directly. Instead, government statisticians estimate the value of GDP by either calculating what the private and public sectors spent and invested on goods, buildings, and services or what households, businesses, and governments received in income.
What GDP Does Not Measure
U.S. estimates of GDP and national income were first produced in the 1930s and from the start, statisticians warned about misusing the data. The first report on GDP was clear that the “welfare of a nation can…scarcely be inferred from a measurement of national income.” In other words, GDP does not measure a nation’s satisfaction or happiness.
GDP also misses key aspects of an economy. For example, the initial U.S. GDP report pointed out that the national income estimate omitted the contribution by homemakers who were unpaid. The report was also clear that working conditions were not factored into the national income estimate.
Does a Higher GDP Lead to Greater Happiness?
An individual or nation’s well-being is more than the economic value produced. The annual World Happiness Report ranks the happiness level of 156 countries based on survey responses. While per capita GDP contributes to a nation’s happiness and well-being, it is by no means the largest contributor. Happiness is linked more to having a network of friends and family that you can depend on and whether you find something to smile or laugh at each day.
According to the 2019 World Happiness Report, Finland, Denmark, Norway, and Iceland ranked as the happiest. None of those countries rank in the top ten in per capita GDP. South Sudan, Central African Republic, Afghanistan, and Tanzania were the least happy and also ranked low in per capita GDP.
The takeaway is once a nation reaches a level of GDP where the vast majority of citizens have adequate food and housing, then other factors, such as a robust social network, contribute more to happiness than economic welfare.
Money For the Rest of Us Episode 282 explores economic growth, well-being, and happiness.
Topics covered include:
- Evidence many Americans are poorer than before the Great Financial Crisis.
- Why life expectancy in the U.S. is falling.
- How satisfied are U.S. citizens?
- What is GDP and why is the U.S. Bureau of Economics developing a new methodology
- What are the flaws with GDP and why does it fall short in measuring well-being.
- Which countries around the world are the most and least happy and what are the factors that contribute to that happiness.
- Why were U.S. founding fathers worried about too many luxuries.
- How the U.S. in the 19th century followed the same manufacturing model that China does today.
National income, 1929-1932. Letter from the acting secretary of commerce transmitting in response to Senate resolution no. 220 (72nd Cong.) a report on national income, 1929-32—The National Bureau of Economic Research
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