2. Background and limits to GDP

Gross domestic product (GDP) was first presented in its original formulation by economist Simon Kuznets in 1937. It was standardised as we know it today in 1953 when the UN–with input of other influential economists such as John Maynard Keynes–created the System of National Accounts (SNA), of which GDP is the headline measure. Since its introduction the SNA has become the gold standard in economic measurement, and has played a crucial role in economic analysis, policy and international comparison. This initial work during the Great Depression and World War II laid the groundwork for modern national accounting systems (United Nations, 2024b).

However, GDP was never intended to be a measure of welfare. In fact, Kuznets explicitly warned against using it in this way (Jansen, Hoekstra et al., 2023). There have been a number of problems identified with the misapplication of GDP that we see today which ground the need to go beyond it. These are summarised below:

A forest will only show up in GDP when it is cut down and sold, while a new coal mine can similarly show up as a huge economic boost. What’s more, there is now fairly irrefutable evidence that GDP growth is destroying our environment, with little to no prospects of this changing anytime soon. Evidence of the decoupling of GDP growth from environmental destruction is highly limited, and is definitely not happening fast enough to meet the Paris Agreement (Parrique et al., 2019). These dynamics are pushing the planet further into ecological crisis and instability. Focusing on GDP masks the role of economic activity in catalysing the ecological crisis which threatens the stability of our societies, and economies themselves.

Feminist economists have noted GDP’s omission of vital socially reproductive work such as care work. And in the negative direction, socially undesirable expenditures–for example on cigarettes or pollution masks necessitated by worsening air quality–show up positively in GDP. To illustrate the sheer scale of what can be missed, one analysis of 30 countries across the globe–many within Europe–identifies that unpaid labour accounts for a staggering 35% of GDP on average (Bridgman et al., 2018).

Olivier De Schutter, UN Special Rapporteur on extreme poverty and human rights, has noted that positive increases in GDP per capita can mask worsening conditions for the worst off due to rising inequality and social exclusion (De Schutter, 2024). GDP’s aggregation of all consumption and output equally also means that one person’s losing access to the fundamentals of life can be compensated by another's trivial consumption.

The so-called Easterlin Paradox, shows that while rich people within countries are happier than their poorer counterparts, over time aggregate happiness across a given country doesn’t really increase with GDP. Now of course these observations largely apply to rich countries; at lower levels increased GDP does correlate positively across many measures of wellbeing however there appears to be a threshold effect, where past a certain point further increases in GDP don’t seem to produce more welfare.

The same principle applies to what we might consider to be important determinants of wellbeing, such as health and education. While a higher GDP can mean more money to spend on these things, past a point they are far more a result of policy around how we choose to allocate our resources rather than the total resources in our society. Outliers on both ends of the spectrum illustrate this point. For example, the UAE has over 7 times the GDP per capita of Cuba, yet life expectancy at birth in the UAE is close to a staggering 6 years lower than in Cuba (Gapminder, n.d.). Similarly in education, based on harmonised scores from student attainment tests Vietnam has managed to achieve better learning outcomes than the USA despite being almost 6 times poorer in GDP per capita terms (Our World in Data, n.d.).