In order to understand the differences between GDP and the CIW, it is important to understand how GDP is defined. Put simply, GDP refers to the aggregate production of an economy — meaning the value of all final goods and services — produced in a country in a given period of time. More technically, GDP can be determined in three ways, all of which should, in principle, give the same result. The three approaches to measuring GDP are: (1) the production or value-added approach, (2) the income approach, and (3) the final expenditure approach.37 To illustrate, using the expenditure approach, GDP is:
GDP = private consumption + gross investment + government spending + (exports-imports)
The CIW, on the other hand, tracks eight domains that together form a comprehensive measure of wellbeing. While the CIW measures how well we fare as engaged citizens in our private, public, and voluntary lives, GDP measures the aggregate of how much money we receive, what we buy with it, or how much we pay for it.
The fact that our wellbeing consistently lags behind expenditures and consumption does not just demonstrate that money cannot buy happiness, but reveals that when GDP is used to guide economic and social policies, we are not necessarily better off as a nation. As illustrated earlier in Figure 1, over time, our economic performance outpaces our quality of life. This is at the very heart of the issue of growing inequality — where some of us do extremely well while many of us fare less well.
Popular GDP myths
Myth #1: GDP shows how well a country is doing
Reality: GDP is not a measurement of a society’s progress or wellbeing. It was never meant to be. As early as 1934, Nobel laureate Simon Kuznets recognized that “The welfare of a nation can scarcely be inferred from a measurement of national income” such as that defined by GDP.38
GDP was first introduced in the U.S. during the Great Depression as a way of measuring how much and how quickly the U.S. economy was shrinking. It was later adopted by the rest of the world because it’s very good at doing what it does — adding up the value of all goods and services produced in a country in a given period. But GDP does not tell us anything about how well or poorly we are doing in a wide variety of other economic, social, health, and environmental determinants that shape our country, our communities, and our everyday lives. In short, GDP tells us nothing about the kind of world we are creating for ourselves and future generations, and whether we are progressing forward or moving back. The CIW does.
Myth #2: All growth is good
Reality: GDP rests on the philosophic assumption that all growth is good — a rising tide lifts all boats. But is all growth really good? And are all activities where no money changes hands of no value? If you’re talking about GDP, the answer to both questions is “yes”. GDP makes no distinction between economic activities that are good for our wellbeing and those that are harmful. Spending on tobacco, natural and human-made disasters, crime and accidents, all make GDP go up.
Conversely, the value of unpaid housework, child care, volunteer work, and leisure time are not included in GDP because they take place outside of the formal marketplace. Nor are subtractions made for activities that heat up our planet, pollute our air and waterways, or destroy farmlands, wetlands, and old-growth forests. The notion of sustainability — ensuring that precious resources are preserved for future generations — does not enter the equation.
The shortcomings of GDP, and its cousin GNP, were summarised most eloquently by Senator Robert Kennedy in a speech he gave nearly half a century ago:
…Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl … Yet the Gross National Product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials ... It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.39
Myth #3: Cutting spending will fire up the economy and boost GDP
Reality: There is no doubt that governments spend a lot of money. But what do they spend it on? Mostly on building schools, hospitals, roads, bridges, public transportation, and paying the salaries of teachers, doctors, nurses, police, firefighters, and a host of other valuable public servants. They in turn return the money to the economy by buying food, clothes, housing, movie and hockey tickets, and generally supporting the many small businesses that dot every street.
Government spending makes up a large part of GDP. This means that when significant cuts are made to reduce deficits, pay down debt, or otherwise “get our fiscal house in order,” a lot of money is siphoned out of the economy and GDP can shrink. If government cuts are big enough to reduce overall GDP, they will automatically push Canada into a painful recession. So instead of firing up the economy, massive public spending cuts can actually achieve the opposite.
The reality is we cannot shrink ourselves bigger. To pay off our public debts, we have to grow our economy. Governments must be part of the equation, but they have to spend and invest in those areas that improve our collective quality of life, so that we have a citizenry with the strength to meet both our challenges and obligations. It is really not that different than a family paying for its mortgage and household costs by getting higher value jobs instead of by cutting back on food and prescriptions.