The Problem with GDP – Why It’s a Poor Measure of Progress, and What We Should Use Instead

Santiago Bel
February 27, 2025

Throughout many years, politicians have referred to GDP growth as the most important number on success statistics. They continually state that if GDP is growing, everyone is better off, especially when comparing different nations. Nevertheless, GDP, or “Gross Domestic Product,” isn’t a measure of progress in people’s lives. In basic terms, it measures production. The figure rpesetnes the total amount of goods and services produced in a country within a certain period of time, but doesn’t specify anything about who is benefiting, what is produced, or what is being lost in the process.

To illustrate, the building of a new factory might increase GDP because it results in the creation of jobs and the supply of valuable materials. However, if a factory pollutes a river next to the factory, which releases lead into the town’s water, the GDP will still be on the rise–even though people are getting sick, the property values are depreciating, and the local government is spending millions to clean up the area. GDP is reflecting the factory's production and the "cleaning" costs as “economic activity.” Actually, the community is in a worse condition. What is being measured looks like growth on paper, but it is void of real growth.

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This issue is rampant, too, in other similar situations. The destruction of homes by wildfires leads to an increase in GDP as those homes are rebuilt. Car accidents cause hospital bills, which contribute to GDP growth. Moreover, the rise in divorce rates could positively affect GDP because the two new households will be buying more goods than the one previously shared. However, none of these things are “progress.” They are the signs of a society that mistakes the volume of activity for welfare.

The problem becomes bigger when it is linked with the issue of inequality. GDP may experience a growth of 3% in a year, but most of that wealth could go to corporations or the top 1%, leaving the majority of people with little or no benefits. In the U.S., GDP has experienced growth for a very long time but the wages of most workers have only been able to keep up with inflation to a minimal extent. Living costs have increased dramatically while debt levels have skyrocketed. The bigger number does not necessarily mean a better life—it only means that more money has been circulated.

Economists have known this for a long time. Simon Kuznets, the inventor of GDP in the 1930s, even predicted that it should not be a measure of welfare when he addressed Congress. He said that growth “may or may not” raise the standards of living depending on who profits from it. But, with the passage of time, politicians and media have converted GDP into an indicator of a nation's success because it is a very simple and easy thing to track. Sadly, what is simple does not necessarily mean accurate.

But what should be the alternative? There is no ideal solution; however, there are several better options. Some countries endorse the Human Development Index (HDI), which takes into account life expectancy, education, and income apart from the output. Others like New Zealand, have already started implementing the “Wellbeing Budget” which measures progress through the factors like mental health, child welfare, and environmental quality. The Genuine Progress Indicator (GPI) is even more advanced as it deducts from GDP the costs of pollution, inequality, and resource depletion, thus showing a clearer picture of whether growth is genuinely making people’s lives better.

Moreover, the change is not only the right thing to do morally but also makes perfect economic sense. A nation that cuts down its woods, pollutes the atmosphere, and pushes its labourers to extreme tiredness may increase its GDP temporarily but is going against its own long-term productivity. Thriving economies depend on healthy people, secure societies, and a planet that is still fit to live on. The “sick” economy will be there when the latter are damaged.

That is how more and more economists are starting to see it: The concept of “growth” needs to be redefined. The real progress should be one that results in better life quality and not only a rise in output. It is more important to consider health, equity, and sustainability rather than just raw growth. In the long run, those are the factors that people truly want and will make an economy strong alongside a good standard of living. GDP was initially envisioned as a measure for a world with factories and the steel industry, but nowadays, though it is extremely important to track, it may be misused, especially in a world with rising issues such as climate change, job displacement, and inequality.

In the end, numbers may look very promising on a spreadsheet, whereas the people may experience a totally different situation, far from the numbers.