Table of Contents

• What GDP measures
• The critiques of GDP
• The other outcomes that GDP can capture
• The practical advantages of GDP

In 1972, the King of Bhutan announced that “gross national happiness is more important than gross domestic product.” It was a charming sound bite that captured imaginations worldwide. Finally, someone was brave enough to say it: Happiness matters more than money.

At the time, Bhutan was poor. More than 50 years later, Bhutan still ranks near the bottom of countries globally in per capita gross domestic product (GDP), a metric that captures the dollar value, per person, of the goods and services that a country produces.

In Bhutan today, life expectancy is 73 years — higher than the 51 years in 1972, but still only right at the world average. Meanwhile, politicians are concerned about “unprecedented” levels of people leaving the country, mostly for economic opportunities elsewhere. While Bhutan’s own Gross National Happiness surveys show rising happiness since data collection started in 2010, internationally comparable surveys show a fall in self-reported happiness in the country.

South Korea took the opposite approach. In 1961, General Park Chung-hee seized power in a country with a GDP per capita of around $93, well below even Bhutan at the time. His goal was modernization: build industries, end dependence on US aid, and export goods to the global market competitively. To track progress, his government launched five-year economic development plans with specific targets measured by economic growth.

While we don’t have information on South Korea’s level of happiness at the time, other results suggest a rapidly improving quality of life. Life expectancy rose from 54 in 1960 to 66 by 1980 to 83 today, a decade higher than in Bhutan. Infant mortality fell by roughly 97 percent. A country devastated by war and dependent on foreign aid became the world’s 14th largest economy. GDP per capita went to over $30,000. The five-year plans used GDP to measure progress, and the GDP numbers tracked real transformation.

This comparison reveals the importance of GDP. Bhutan explicitly prioritizes happiness over economic growth, but its happiness has increased only marginally, and the country has not experienced the broader improvements in living standards that matter to people. South Korea pursued concrete development goals, used GDP to measure progress, and succeeded at economic transformation. South Korea hasn’t prioritized happiness metrics, but, in surveys of self-reported happiness, remains consistently ahead of Bhutan.

Today, GDP faces fierce criticism from economists, journalists, and even Elon Musk, all of whom argue it doesn’t capture what really matters. Critics love proposing alternatives, such as happiness indices, well-being measures, and sustainability metrics. Yet all of these critiques have a common flaw. They are correct that GDP isn’t a perfect measure of human flourishing, but it does reliably capture whether your economy is actually developing. And economic development is the foundation that makes progress on many other goals possible.

What GDP measures

To understand why GDP remains indispensable, we need to look at what it actually is. GDP is a “national account,” or a record that tracks all the economic activity in a country. Think of it as a country’s financial statement, similar to how a business tracks its revenues and expenses.

In the early 1930s, Congress tapped economist Simon Kuznets to develop the first national account. The government wanted to know whether the economy was recovering from the onset of the Great Depression, and if so, how fast, and by how much.

Before that, policymakers had price indices and production numbers, but they lacked a comprehensive measure of economic activity. Creating one required Kuznets to solve a series of conceptual and practical problems: how to aggregate millions of transactions across different industries, how to avoid double-counting when one business sells to another, and how to collect data from businesses that had never reported such figures before. Kuznets gave them such a measure.

The history of GDP is interesting, but the important part for people today is what the number means. GDP measures the total market value of all final goods and services produced within a *country *in a given time period. Each of these words matters. Let’s go through them in a logical order.

If Ford buys steel from US Steel to make a truck, GDP only counts the truck’s sale price, not both the steel and the truck.

The “market value” part means GDP uses the prices at which goods and services actually sell. In its measurement, a $50,000 car counts 50,000 times more than a $1 soda. The “final” part prevents double-counting. If Ford buys steel from US Steel to make a truck, GDP only counts the truck’s sale price, not both the steel and the truck. The steel’s value is embedded in the truck’s price. Since we are looking at gross domestic product, we only want to look at things produced within a country, not what people buy.

The “total” seems straightforward: We don’t want to just look at one part of the economy, like manufacturing. In practice, we can only get to the total value by adding up different categories of the economy — everything from groceries to software to net exports (exports of American-made products to other countries minus imports).

This is similar to how your personal budget line items tell you whether you’re spending more on housing or entertainment. These categories help break down where economic activity occurs, but they are not GDP itself. GDP is the total. Accordingly, some critiques of GDP — such as when Patrick Fitzsimmons recently wrote that GDP is “completely wrong” and “totally broken” — are really critiques of how to interpret those specific components and which interpretations get used in public discourse, not of GDP itself.

It should be immediately apparent what GDP leaves out. GDP was designed to measure market production, so it doesn’t count unpaid work. If you cook dinner for your family, that doesn’t show up in GDP. If you pay someone to cook dinner for you, it does. Spending to rebuild after a hurricane adds to GDP, even though the hurricane itself destroyed wealth. Moreover, GDP doesn’t track environmental costs. While people talk about “the cost of carbon,” most of the time, it is not a price that anyone actually pays, so it’s not counted.

GDP doesn’t measure income distribution. GDP doesn’t distinguish between activities that improve welfare, like going to a movie, and activities that respond to problems, like deciding to buy a new lock because crime has risen. None of these missing parts is hidden or controversial.

The critiques of GDP

The critiques of GDP come from different angles. The first concerns what GDP measures. For example, in 2009, the Commission on the Measurement of Economic Performance and Social Progress, led by Nobel Prize-winning economist Joseph Stiglitz, argued “What we measure affects what we do; and if our measurements are flawed, decisions may be distorted.” And because GDP leaves some stuff out, it is flawed as a measure, according to the commission.

Yet this critique judges GDP against a standard it was never designed to meet and that no one ever claimed it met. No metric is all-encompassing. Kuznets himself warned Congress in 1934 that “the welfare of a nation can scarcely be inferred from a measurement of national income.” The people who created GDP knew what they were building: a measure of market production, not a measure of human flourishing.

A slightly different line of critique, as Stiglitz has argued elsewhere, is that focusing on GDP makes policymakers “more materialistic” and leads them to neglect policies that would improve health, education, wealth equality, and the environment. Similarly, journalist David Pilling argues in The Growth Delusion that our fixation on GDP growth can justify destructive policies that lead to environmental degradation and growing inequality.

Yet these critiques are more aimed at politicians who focus on GDP than on the measure itself. The critics position themselves as revealing that we need multiple measures, but no country has ever made decisions based solely on GDP growth. Governments do also pay attention to these other issues.

Ultimately, Stiglitz’s own commission recommended maintaining GDP as part of a broader “dashboard” of indicators. Pilling, after cataloguing GDP’s limitations, concludes it “should definitely not be scrapped.”

The other outcomes that GDP can capture

GDP carries weight as a metric for good reason; despite its narrowness, it relates closely with nearly every outcome people care about.

For example, people in countries with higher GDP per capita live longer. While detractors sometimes point to cherry-picked examples, such as New Zealand, which has a lower GDP than the United States but higher life expectancy, that’s not the case in general.

Higher GDP per capita also correlates with lower infant mortality, higher educational attainment,reduced extreme poverty, and higher self-reported happiness. This last point deserves emphasis: life satisfaction, the primary measure used in the World Happiness Report and similar well-being indices that critics often propose as alternatives to GDP — itself highly correlates with GDP.

The closest thing to an exception is environmental quality, which often shows a U-shaped relationship with GDP. Pollution tends to rise in early stages of economic growth before declining as countries grow wealthy enough to invest in clean technology and environmental protection. For wealthy countries like the United States, higher GDP does seem to correlate with improving environmental quality.

And these correlations make sense. Economic production is the foundation of tons of other things we care about. You can’t have broad or universal health care without the economic capacity to pay for it. You can’t fund education, build infrastructure, or protect the environment without resources. And GDP tells you how much resource-generating capacity you have by looking at how much you are doing right now.

The practical advantages of GDP

These correlations explain the appeal of GDP, but not why it, uniquely, is the measure of choice. Why does nearly every country produce GDP estimates quarterly? Why do markets and policymakers treat it as such an important economic indicator? Simply put, GDP has practical advantages that no alternative measure can match.

For most countries, for more policy decisions, what we need is to build productive capacity, and raising GDP captures whether they’re succeeding.

The most important advantage is the timeliness. In the United States, the Bureau of Economic Analysis releases preliminary GDP estimates roughly one month after each quarter ends, with revisions following as more complete data arrives. This frequent reporting allows governments to spot recessions early and adjust policy accordingly, as they hoped to do during the Great Depression. By contrast, Bhutan’s latest Gross National Happiness data is from 2022. Presumably, that could be sped up with more funding, but I’m not sure happiness rising from 0.76 to 0.77 from July to August is going to help Bhutan’s central bank when setting interest rates.

The importance of accurate, up-to-date data became painfully clear during the policy mistakes of the 1970s. As economist Athanasios Orphanides has documented, faulty GDP data, caused by measurement problems and data revisions, led the Federal Reserve to believe that the economy was operating further below its capacity than it actually was. As a result, the Fed pursued policies that accelerated inflation.

Statistical agencies have made substantial improvements since then. The Bureau of Economic Analysis now collects data electronically from businesses rather than waiting for paper forms. Preliminary GDP estimates arrive faster and with smaller revisions than in the 1970s, though measurement challenges remain.

Policymakers want timely GDP data so bad that the Federal Reserve Bank of Atlanta created GDPNow, a forecasting model that produces real-time estimates of GDP growth based on incoming economic data. Rather than waiting a month after quarter-end for the BEA’s preliminary numbers, GDPNow updates continuously as new data on retail sales, industrial production, trade, and other indicators become available. It’s still preliminary but highlights the importance of up-to-date data that is aggregated.

Given all of the effort put into improving GDP metrics over the years and across the world, we also have measures across time and place. While different countries’ measures have different levels of reliability — for instance, China’s numbers are always suspect — we can meaningfully compare economies across borders. We can compare GDP across decades, even centuries in some cases, to understand long-run growth patterns. This historical perspective is helpful for economic research and broader policy knowledge.

Are there situations where raising GDP might conflict with other goals? Sure. Trade-offs exist, but we shouldn’t get bogged down in imaginary ones. There are people for whom training to become a faster 5K runner might hurt their marathon time. But that’s really only if you’re an elite athlete optimizing for specific events. For most people, like me, there is no real trade-off.

For most countries, for more policy decisions, what we need is to build productive capacity, and raising GDP captures whether they’re succeeding. All the outcomes move together. Debating little trade-offs between GDP and alternative metrics misses the point.

This story was supported by a grant from Arnold Ventures. Vox had full discretion over the content of this reporting.