Barro On GDP and Welfare

Barro [2019] observes that GDP is not a good measure of welfare. Yes, we already knew that, but we use it anyway because it so comprehensive.

But that comprehensiveness gets us into trouble because GDP is a better measure of effort than consumption/welfare.

In particular, he points out that we double-count investment. It’s counted initially when it’s purchased and added to the existing stock of capital. But it’s counted a second time when we include the income from what the existing capital stock produces.

It’s a good thing to count his somewhere, but it’s probably not a good thing to count it in something you’re going to use to assess welfare.

The upshot is that countries that invest more have higher GDP without necessarily making their people better off. That’s not an argument to not invest, but rather an argument that ranking outcomes by GDP will make countries that gyp their citizens look better off than they are.

Here’s a low level discussion of the results, asserting that over half of the capital share of GDP (that thing progressives are so worried about going up) should not be included in GDP at all.

FWIW: this paper shows one of the top macroeconomists of the last 50 years using a model not much beyond what we do in ECON 3020 and the Handbook for the class to make a fundamental point about how we should think about the world. And the method is calculatable with currently existing data.