It is very common to use a country’s GDP or GDP per capita to evaluate a country’s development and productivity, as well as the well-beings of people. However, over-emphasizing on the ranking of GDP could also be misleading. In particular, it is important to examine people’s happiness index instead of using GDP as a proxy for well-being.
As the new evidence presented by Proto (Warwick University) and Rustichini (University of Minnesota) last year, they have found that the relation between GDP and happiness is hump-shaped across countries (see the following graph, with X-axis as GDP quantiles, and Y-axis as life satisfaction). There is a clear, positive relation in the poorer nations and regions, but it flattens out at around $30,000–$35,000, and then turns negative.
Link to their article: http://goo.gl/oQzXqP
Graph: Relationship between GDP per capita and life satisfaction
From Figure 1 below, we can see that high GDP per capita does not immediately translate to a higher happiness index. This tells us that it is certain that the richer is not necessarily the happiest. Therefore, besides income, there must be other important factors that contribute to people’s happiness besides money.
Figure 1 GDP per capita and Happiness Index world map
(Source: Wikipedia)
One possible factor is income inequality, especially for more developed countries. Canada, Australia, and European countries such as Germany, Norway, Sweden, and Finland have lower income inequality and also have higher happiness indices compared to the United States. This raises an issue that although production is important, the allocation and distribution of the production is even more important.
Figure 2 Income inequality world map (higher Gini Index means higher inequality)
(Source: Wikimedia)
However, this correlation between happiness and income inequality does not seem to be equally applicable to other less developed countries. For instance, central and southern America countries, such as Mexico, Argentina and Brazil have high income inequality, but people are happy. On the other hand, people in central Africa are less happy even though the income inequality is low.
This tells us that there must be other factors which should be taken into account. For instance, besides income inequality, other possible important factors are levels of peace and the degrees of corruption. Take Russia, China, India, central Asia countries and central Africa countries as examples, the degrees of corruption play an important role in determining people’s happiness. In terms of the level of peace, it rationalizes the happiness index for Russia, countries in central Asia and central Africa.
Figure 3 Corruption index world map (higher score means less corruption)
(Source: TargetMap)
Figure 4 Peace Index world map (Source: Economist Intelligence Unit)
This evidence suggests that there is no single factor which can explain the happiness of people. Factors such as income level, income inequality, and the degree of peace and corruption all play important roles. This suggests that when we look at a country’s GDP, we should not jump to the conclusion whether living in one country is better than another. Instead, we should understand the measurement of GDP is simply a number that measure a countries total production/income without taking into account other factors such as income inequality, peace, corruptions and culture, etc. This, however, does not imply that GDP measurement is useless. It just tells us that it is important to understand the fact that all measurements have their functions and limits. Thus, we, as readers, should be aware of it when using them.
In addition, the link between higher national income and higher national happiness is critical to economic policymaking. Since the evidence about the relationship between GDP and happiness suggests that GDP is not the only important thing in determining government policy, governments should consider all other aspects to improve the well-beings of their citizens.
Author: Ming-JinJiang
