By Gita Smith
Using gross domestic product (GDP) as a measure of a country’s welfare has its limitations. So how, then, are we to measure a nation’s well-being?
Georgia Tech School of Economics assistant professor Seung Hoon Lee, with co-authors Jeffrey Lin and Sang Hoon Lee, proposed a new method of estimating the well-being of nations.
The key assumption is that people tend to move from places with low availability of goods and services to those with higher quality of life. Using two-way international migration flows and a model wherein everyone in the world chooses a country in which to live (including the option of staying), they estimated each country’s overall quality of life. Their estimates complement previous estimates of well-being that consider only income, or a small number of factors, and that rely on strong assumptions about how these factors contribute to well-being.
Moving costs across countries may prevent people from correctly gauging the quality of life in the country in which they are interested. For example, the U.S. has strict immigration rules that may underestimate U.S. welfare. In contrast, the welfare of North Korea can be overestimated since it’s hard to leave the country. Hence, the authors controlled for various factors related to moving costs such as immigration policies, distances, common language, and historical colonial link. They also look at correlations between a country’s welfare and its characteristics such as education, social safety net, inequality, or corruption.
The study compared country welfare estimates with GDP per capita, which is the commonly used measure for a country’s well-being. Their conclusion is that there is a high correlation between GDP per capita and their own measures. All in all, their estimates of countries’ well-being aﬀirm the relevance of GDP for welfare. But, as with all good economists, Lee, Lin and Lee add important nuances to the issue.
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