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Well-being is not the same as gross domestic product

April 1, 2019 | Commentary

  • Gross Domestic Product (GDP) is the most widely followed measure of a country’s economic status.  Based only on transactions that occur in formal markets, GDP misses much economic activity.  Since it also fails to account for non-market environmental factors and the impact of income inequality, it is far from a perfect reflection of a country’s well-being.
  • Recently, researchers have created indexes that try to capture welfare.  These measures include traditional consumption, but also health, environmental and sustainability factors.  Not surprisingly, GDP and welfare are closely correlated but there are countries that get more welfare bang for the GDP buck than others, as well as nations where well-being lags meaningfully.
  • Investors should care about this research because GDP is too often held out as a reliable guide to good investing.  Allocating across countries is more complicated than that.  Long-term stock market value is based on sustainable earnings which are likely more influenced by broad welfare measures rather than the narrow path of GDP.
  • While there is definitely a long-term link between GDP growth and stock market valuations, there are potentially many pitfalls along the way if that growth does not also lead to better longevity, environmental quality or wealth distribution.
  • While improvements in economic statistics have been encouraging, there is much work yet to do.  GDP statistics, largely developed almost 100 years ago, may have serious deficiencies when it comes to reflecting the activity in the 21st Century technology-driven economy.

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