Limits of GDP

How happy are you? Economists generally rely on monetary measures like GDP per capita to answer such questions. After all, satisfying wants is a function of what we consume, and so using per capita income as a proxy for well-being makes sense.

However, as the OECD’s 2006 edition of Society at a Glance reports, income’s usefulness becomes less obvious as developed societies reach a situation of plenty; after a certain point, just as money does not buy everything, so well-being does not rise much either.Also, as the graph indicates, Mexico’s high level of satisfaction belies its relatively low GDP, whereas in wealthier Japan, life satisfaction is lower. Measuring individual, rather than country, well-being is a more reliable option, Society at a Glance suggests, and one obvious way of doing this is by asking people how they feel about their lives.Their answers may reflect cultural attitudes, transient factors or linguistic differences, but studies have shown that individuals who report higher levels of life satisfaction are also rated as happier by their relatives and friends. They smile more and deal better with stress, too. They even have higher activity in the pre-frontal part of the brain, which is associated with positive states. While factors such as work, family, health and education play a role, the report points out that income loss has a bigger effect on well-being than a comparable income gain, partly reflecting pressure to “keep up with the Joneses”. Reference

OECD (2007), Society at a Glance: OECD Social Indicators, 2006 edition, Paris.

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