GDP and Living Standards
“Which would you prefer to be: a medieval monarch or a modern office-worker?” If you immediately answered medieval monarch, take a moment to ponder life without “…modern dentistry, antibiotics, air travel, smartphones, and YouTube.”
Last week, The Economist used this example to illustrate the challenges of accurately measuring living standards over time. For many years, countries and economists have relied on gross domestic product (GDP), the value of all goods and services produced by a country over a specific period of time, to gauge relative prosperity. The publication pointed out GDP may not be an accurate measure of well-being because it does not account for changes in quality of output:
“…The benefits of sanitation, better health care, and the comforts of heating or air-conditioning meant that GDP growth almost certainly understated the true advance in living standards in the decades after the Second World War. But at least the direction of travel was the same. GDP grew rapidly; so did quality of life. Now GDP is still growing (albeit more slowly), but living standards are thought to be stuck. Part of the problem is widening inequality: median household income in America, adjusted for inflation, has barely budged for 25 years. But increasingly, too, the things that people hold dear are not being captured by the main yardstick of value.”
Whether it accurately reflects growth in the United States or not, U.S. GDP gained 0.5 percent during the first quarter of 2016. Barron’s reported investors were not encouraged by the less-than-robust growth rate or by the fact GDP growth in the Eurozone (0.6 percent) exceeded GDP growth in the United States during first quarter.
Weak corporate earnings also influenced market performance last week. So far, 62 percent of companies in the Standard & Poor’s 500 Index have reported their results, and the numbers show first quarter earnings have declined by 7.6 percent, year-over-year. That is better than expected, according to FactSet, but nothing to write home about.
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* “GDP and Living Standards”