If one looks into the goals of most countries’ economic policy decisions, a common mantra seems to appear: “increase the size of the economy as this will increase the overall wellbeing of the country’s population”. However, this raises the question if the sole increase in the size of a nation’s economy, usually measured with the GDP, will actually lead to an increase in the country’s wellbeing levels as well. If sayings such as “Money can’t buy you happiness” are to be believed, one might quickly think that measuring only the GDP might not be enough to understand how well people living and working in a country are. Yet, on the other hand, it appears quite straightforward that if people’s desires can be met by them having access to more goods and money, some increase in wellbeing would be natural. The question becomes even more evident, given that GDP does not give any information about how the measured income is distributed among the population. In theory, a high GDP could benefit only a very limited number of people, while the vast majority live in misery. As a matter of fact, the question of whether GDP is a sufficient measure for an economies progress and the wellbeing of a country’s population, is not a new one, as many economists have already researched the connection between GDP and wellbeing, or put in a simpler manner, happiness (Harvard Business Review, 2012).

The issue with GDP

Many young economics students are likely to be familiar with the Easterlin Paradox, the observation made by Richard Easterlin, that an increase in GDP does only lead to an increase in happiness among the relevant population, until a certain threshold, after which no correlation between the two is observed. In other words, as long as basic necessities are met, an increase in income is only marginally related to increases in happiness. At the time, this finding spurred an increase of research addressing economics and happiness, with some scholars trying to refute Easterlin’s observations, and others trying to identify new ways in which a nation’s economy can increase the happiness of its population. The first group had quite some success in identifying a few shortcomings in Easterlin observations, such as Stevenson and Wolfers, who did indeed find a more pronounced link between GDP and happiness than Easterlin did originally. However, the latter group also made significant contributions in identifying how an economy can benefit the population’s happiness and wellbeing by observing measures beyond just GDP.

To clarify, GDP in and of itself is not a bad measure, the overall income generated in a country is linked to its population’s wellbeing. Especially when adjusted for both population and purchasing power, GDP is still a valuable metric in assessing how an economy affects the wellbeing of a country, as emphasized by the findings of Stevenson and Wolfers. Yet, it is evident that happiness and wellbeing are also tied to several other factors, that GDP does not cover.

Alternative Measures for economic progress

One of the oldest and most common metrics to assess the wellbeing in a country beyond purely financial terms is the Human Development Index (HDI), which in addition to financial measures, also looks at health and educational metrics (United Nations Development Program, 2024). That Healthcare and Education are beneficial to one’s wellbeing appears logical, and is in fact empirically backed, but when looking just at GDP those metrics, and particularly their accessibility, tend to be overlooked. When it comes to accessibility, it has also been observed that large disparities in wealth and income within a country negatively affect wellbeing. Therefore, if a country has extraordinarily high levels of GDP but that is limited only to the top income percentile of the nation, overall wellbeing would suffer.

One important measure to see how well distributed an economy’s income is, is the GINI coefficient. A Gini coefficient of 0 would mean that income is equally distributed, while a coefficient of 1 would mean a single individual has all the income, while the rest have none. Typically, the Gini coefficient of developed economies lies between 0.25 and 0.5, while some highly unequal countries have measures up to 0.7 (World Bank, 2024).

Those metrics, however, are not sufficient in assessing the actual wellbeing in a population, as they still don’t account for many other relevant factors, such as work-life balance, housing accessibility and quality, or time spent with friends and family, all factors that have been observed to positively affect wellbeing and that are mostly tied to the economy in some capacity.

Measuring wellbeing

Over the past couple years, one of the most relevant institutions to develop a framework to assess wellbeing across various economies was the OECD. Based on the work of several economists and sociologists, they developed the Better Life Index, with which one can assess the wellbeing present in different countries based on the metrics Housing, Income, Jobs, Community, Education, Environment, Civic Engagement, Health, Life Satisfaction, Safety and Work-Life Balance (if you want to check out how your country is performing, check out the link). In addition to this, the OECD also regularly publishes the “How’s Life report”, which, based on the same metrics as the Better Life Index, goes into detail how wellbeing across OECD countries is developing, while also suggesting policy implications (OECD, 2024).

But the OECD is not the only institution measuring and assessing wellbeing beyond GDP. For instance, the United Nations are a relevant player in the field of measuring wellbeing, which is also part of the Sustainable Development Goals. When it comes to the overall Quality of Life (QoL), the World Health Organization (WHO) has developed a framework, the WHOQOL-100, under which it regularly assesses the wellbeing across different countries. The index includes several physical as well as psychological health related metrics, in addition to social, environmental, and financial ones (World Health Organization, 2012).

The great number of indices developed makes evident that to measure the wellbeing and/or quality of life people enjoy, it is essential to take into account many indicators which have very little relation to GDP but are still tied to the overall economic performance of a country. Also, because a happy population tends to be a competitive advantage for a nation, however this relation is often ignored in economic policy. This shortcoming has been observed by several economists, who have started attempting to change the way economic policy is done. One of the frontrunners in this was the British Economist Richard Layard, who suggested to assess the subjective happiness of the UK population in conjunction with GDP, and to implement strategies to tackle mental health as well as security concerns among the population to increase happiness (The Guardian, 2020). An often-cited policy example is also the small Himalayan country of Bhutan, which actively measures Happiness with their Gross National Happiness index. Recently, also New Zealand joined the ranks of countries dedicating resources to increase wellbeing, in an attempt to bring the benefits of a strong economy to the entire population with their Wellbeing budget (first implemented in 2019), with some of the main goals being to reduce cost of living, improving education and access to healthcare across the country (Wellbeing Budget, 2023). The OECD also encourages more of its member states to implement similar policies, shifting to a wellbeing economy, even acknowledging that the benefits of increased wellbeing are essential to sustain long term economic growth. Overall, it is evident that there are several areas on which national economies can focus to increase the wellbeing of people at large, aside from the pure focus on increasing GDP. One can only hope that in the next decades economic policy will at large acknowledge the relevance of focusing on wellbeing and implement more wellbeing increasing policies to make life better for all of us.

References:

Easterlin, R. (1973). Does Money buy Happiness? The Public Interest, 30, p.3-10 Stevenson, B., Wolfers, J. (2008). Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox. Brookings Papers on Economic Activity, Economic Studies Program, 39, pages 1-102

United Nations Development Program (2024). Human Development Index (HDI). https://hdr.undp.org/data-center/human-development-index#/indicies/HDI

World Bank (2024). Metadata Glossary. GINI Index. https://databank.worldbank.org/metadataglossary/gender-statistics/series/SI.POV.GINI

World Health Organization (2012). The World Health Organization Quality of Life (WHOQOL). https://www.who.int/publications/i/item/WHO-HIS-HSI-Rev.2012.03

Wellbeing Budget 2023 (2023). New Zealand Government. https://www.treasury.govt.nz/publications/wellbeing-budget/wellbeing-budget-2023-support-today-building-tomorrow

OECD. Better Life Index. https://www.oecdbetterlifeindex.org/#/11111111111

Harvard Business Review (2012). The Economics of Well-Being. https://hbr.org/2012/01/the-economics-of-well-being

The Guardian (2020). Richard Layard: ‘It’s in politicians’ self-interest to make policies for happiness’. https://www.theguardian.com/books/2020/jan/19/richard-layard-everybody-could-have-a-better-time-extract-from-can-we-be-happier