Pointing out the problems with GDP as a metric has now reached the point where “No actually GDP growth really is important” is the boring conventional wisdom (at least around me). And that’s not entirely wrong, the average policy exchanging GDP for unspecified benefits is probably bad. But still, GDP is often a bad metric to measure how rich a country actually is, and it’s worth pointing out some ways in which this happens.
First, guiding examples: According to GDP metrics Ireland is the richest country in the world1 Mississippi is richer than France and Israel is the 13th-richest country in the world, above not only France but also Sweden, Canada and Hong Kong. As anyone who’s been to these places knows, this is clearly absurd as a measure of actual wealth. So what’s going on? Some explanations:
PPP vs GDP: PPP somewhat adjusts for cost of living, which helps adjust for actual lived experience (it adjusts somewhat for higher costs caused by both higher salaries and government policies). Going by this Israel’s all the way down to 30th place, Which is somewhat less crazy but still puts it above Italy and Japan, so it can’t be the only thing.
Labour productivity: A country where people work 50 hour weeks for the same living standards as one where people work 30 hour weeks is clearly much poorer but looks the same on GDP, which doesn’t include leisure time. This explains a lot of the Israel situation (it’s still 29th place on the list, but this is a much shorter list and none of the countries that should obviously be richer than Israel are behind it2).
Infrastructure and government services: We measure the value of things for GDP by looking at their price, which is mostly a good proxy for value. Governments pay wildly inconsistent amounts for different levels of services3 in a way that’s poorly correlated with actual service quality.
This is a big one for Europe vs US (but also affects Israel, which gets roughly US level services for European taxes). I can’t tell if it’s due to an inherent tradeoff (e.g. there’s a limited amount of talented people and in Europe they go into public service while in the US they do private sector jobs and raise income), or it’s just a coincidence (US is good at private companies, France is good at public service, Singapore is good at both, Ethiopia is bad at both).
After Luxemburg. I’m going to ignore Luxemburg, because I’m pretty sure it’s a made-up place to make the map of western Europe look less boring.
South Korea and Portugal maybe? I haven’t actually been there and can’t say for sure. They do both seem to have real issues, so it’s at least not an obvious call anymore.
I talk about this a lot on transit issues - American transit agencies spend 30 times what Spanish or Koreans do per mile of subway and end up with worse-quality service - but it’s true for a lot of government services, which are a major part of the economy and arguably an even bigger part of actual everyday life.
One thing is that the G in GDP means that the PPP cannot actually take differing needs into account. If my employer moved ten miles further away from my place and increased my salary by the total amount it'd cost me to travel ten miles twice a workday, my gross income would go up but I wouldn't actually be any better off in any meaningful sense (even disregarding your point 2, let alone taking it into account). So, the PPP adjustments know that one gallon of gasoline is much cheaper in the US than in the Netherlands, but they don't know that the average Dutch person will need much less gasoline to achieve the same goals as the average American person, they know that keeping the air conditioning on is much cheaper per hour in Texas than in Ireland but they don't know that you need to keep the air conditioning on for much longer in Texas than in Ireland to achieve the same indoor temperature, and so on.