In recent months, there has been widespread discussion around the state of the UK’s economy. Various institutions, such as the Bank of England and the International Monetary Fund, have alluded to the UK economy shrinking and potentially entering a recession . However, recent research suggests that such a downturn may not be as severe as originally expected. Given this, are our measures of the size of an economy sufficiently comprehensive? Will the UK economic downturn be as severe as expected, and what does this mean for how we measure economic hardship?
The UK’s looming recession has sparked an interest in how we measure and value a country’s economy, which traditionally has been through Gross Domestic Product (GDP).This momentum has even made its way to LinkedIn, where the news editor in February asked whether GDP is the best measure of economic growth, given that it does not seem to reflect the extent of the current cost-of-living crisis. This has spurred debate around the limitations of GDP and the adoption of more holistic measures.
It is widely acknowledged that GDP is a flawed measure of the size of an economy. As early as 1968, Robert F. Kennedy stated GDP “measures everything…except that which makes life worthwhile.”
By focusing solely on formalised money transactions, GDP omits several activities in the economy. For example, GDP does not account for the substantial ‘shadow economy’, which across 158 nations has an average size of 31.9%. GDP also overlooks unpaid work, such as housework and childcare, which is more likely to be regularly undertaken by women.
There are also numerous paradoxes contained within GDP. For instance, tearing down all trees in a forest for the sale of timbre would result in a sharp immediate spike in that country’s GDP, with no accounting for the longer-term environmental and social damage that this would cause. To give another example, if a country’s wealthiest 1% is getting significantly richer, whilst everyone else in the country is getting poorer, this could increase GDP, with no consideration for the growing wealth disparity. The main reason for these paradoxes is that GDP is an incomplete measure of the economy - it does not consider the environment, wellbeing, or inequality.
The UK Government has acknowledged the limitations of GDP and taken steps to build more comprehensive economic measures, in particular:
o The Natural Capital Approach –aims to address environmental and sustainability measurement considerations by accounting for natural capital,
o Culture and Heritage Capital – a similar approach is being developed with respect to culture and heritage capital,
o Green Book Supplementary Guidance: Wellbeing - aims to address wellbeing and inequality measurement considerations.
It must be noted, that there are also a growing number of initiatives worldwide that aim to measure progress beyond economic activity, some of these have been outlined recently by the Financial Times. As well as research into developing alternative measures modelled on GDP, such as Gross Ecosystem Product (GEP).
Moreover, numerous indices have been developed to try and measure wellbeing across different nations (World Happiness, Better Life Index, Happy Planet Index) . These indices do have limitations, particularly in relation to their cross-country robustness. As such, the adoption of these indices to compare economies globally remains on the fringe of GDP.
Importance of encompassing wellbeing
Encompassing wellbeing (i.e., individual’s and communities’ quality of life) provides us with a more comprehensive measure of a country’s economy, rather than focusing purely on monetary/financial transactions. As such, this is a more accurate reflection of a country’s reality.
This is very important both from governmental policy-making and from business decision-making perspectives. For instance, returning to the tearing down all trees for timber example, adopting a more holistic measure could lead us to take a different decision. Measuring and understanding the wellbeing benefits of having trees (i.e. physical health benefits of cleaner air, mental health benefits of woodland etc.) could lead us to protect, rather than cut down, the trees. Equally, should the decision be taken to cut down the trees, by adopting the wellbeing perspective we might also consider how to potentially counter the negative effects (such as incentivising sustainable forestry, increasing the protected woodland area, etc.).
And beyond being morally just, embedding wellbeing measures helps us (both policy makers and businesses) make more fully-informed decisions, which ultimately affect national and global economic measures; in other words, it makes business sense.
It must be acknowledged that there are many challenges to incorporating wellbeing in measures of a country’s economic activity. For example, wellbeing measures are based on self-reported data, which is prone to certain biases. Further, how we compare this self-reported measure across countries is a challenge as social norms may differ across countries . A further consideration linked to this is whether the wellbeing of everyone across the world should be treated the same or whether we should strive for some redistribution i.e., value more an improvement in wellbeing where the average quality of life in that country is low. This introduces several sociological and ethical dimensions .
Embedding wellbeing in how we measure and understand the economic health of nations is not an easy challenge. However, it is a necessary step to develop more comprehensive measures of an economy and ultimately lead to better informed decision making. We need to consider wellbeing measures, and not rely purely on financial metrics, when exploring the size and health of a country’s economy.
In the context of the UK’s looming recession, focusing solely on GDP portrays an incomplete picture of the current UK economy and underestimates the burden on people’s quality of life from the current cost of living crisis. Conversely, a focus on people, through wellbeing measures, rather than financial measures provides a more holistic view.
At Simetrica-Jacobs we are experts in wellbeing valuation and believe in the importance of considering people’s quality of life when undertaking economic analysis. This is also true when considering a country’s economy. In the next blog post we will outline how we measure the negative wellbeing impact from the current cost of living crisis, whereby focusing solely on financial loss is an underestimate of people’s cost-of-living burden.
Author: Daria Incarnato
A recession is defined as when the economy shrinks over two consecutive quarters.
 These indices do have limitations, particularly in relation to their cross-country robustness. This is explored in further detail in the ‘Importance of encompassing wellbeing’ section.
 In turn this may affect people’s propensity to report a certain level of wellbeing.
 It is worth noting that this ethical inequality dimension has been explored as part of The HM Treasury’s Green Book, however from a UK basis consideration rather than global.