Transcript | 7. lecture: Wealth, performance, or luck? - University for modern Slovakia

In the last two lectures we talked about the wealth of nations and we showed examples of several countries, especially those who managed to get out from poverty and become rich in recent decades. Indicator by which we do all these comparisons is called the gross domestic product (GDP). In order to make the comparison possible, we base it on data the per capita and these figures are also presented in the so-called purchasing power parity, thus they are adjusted for differences in price levels across countries.

What does GDP actually mean? The definition says that it is the total market value of all final goods and services produced per year in the country. The equivalent is also the total consumer, investment and government expenditures plus the value of exports minus value of imports.

In principle, therefore it is more about economic efficiency than the wealth of the country. It applies, however, that the economy which is more efficient over the years, is also richer. Likewise it is among sportsmen such as hockey players. The most powerful get to play in the NHL or KHL, and after years of playing at this level due to their high performance become rich.

Economists and also the very GDP indicator can often be target of criticism as representing the things in a narrowing manner, meaning that the economy, efficiency, and wealth are not all that is needed and the country, but especially politics, should be evaluated also in other areas and contexts. One can only agree, like with the idea that the ultimate goal should not be any indicator, money, or wealth, but rather the quality of life, happiness and standard of living. It's true, but I would also point out that growth of GDP, i.e. economic growth is a prerequisite for employment growth, living standards growth, and therefore the quality of life improvement. This is especially true in terms of growing global population.

There is consensus that economic growth (i.e. GDP growth) means the growth of wealth. There is much less consensus on whether this means also happiness growth. Happiness is a very subjective thing and wealth may or may not be related to it. Economist Richard Easterlin in 1974 came to the conclusion that wealthier companies are not happier than poorer ones. Since then this view is fairly widely accepted as Easterlin paradox. Recent studies (e.g. Arthur C. Brooks), however, questioned this conclusion, although there is a consensus that there is no direct correlation between wealth and happiness.

Well-known, slightly broader than the GDP index is Human Development Index (HDI), i.e. human development index. In addition to GDP it takes into account life expectancy and education levels in a given country. When comparing the level of countries by GDP and HDI, however, we can see that although the order of countries may be slightly different, in principle, there are no significant differences. For example, when comparing the two charts for 2009 probably the most significant difference is in Iceland, which is on the 15^th place according to GDP and on the 3^rd place according to HDI. Otherwise, the differences in the locations of the richest countries in the charts are minimal. Even our location shows small differences - we were on 40^th place according to GDP and on the 42^nd according to HDI. Even at the end of the world ranking the situation is not opposite. The worst in terms of HDI are the poorest countries.

Much more interesting, however, it appears when we look at the differences in the assessment of life satisfaction, or if you want the differences in the index of (subjectively) perceived happiness. I compared for you the index of life satisfaction in 2006 and the ranking of countries according to the level of GDP (for 2009 by the International Monetary Fund). The comparison is very simple – since in principle all the same countries are evaluated (181 by GDP and 178 by the index of happiness) and essentially at the same time (2009 vs. 2006), I simply compared the location of each country in both evaluations.

If a country has a similar placement on both charts, level of happiness is consistent with the level of wealth. If it is ranked higher by happiness than by wealth, it is relatively (in regard to wealth) happier, and if on the contrary, it is relatively unhappier. What are the results? Absolutely most happy nations are the richest countries like Denmark, Switzerland, Austria, Iceland, Finland etc. However, relatively happiest country in the world is Bhutan with a score of +96 (104th place according to wealth and the 8th place according to happiness) and then followed by Vanuatu, Guyana, Honduras, Guatemala, Ghana, Costa Rica, Colombia etc.).

And what’s on the other end? Absolutely unhappiest and dissatisfied are people in the poorest countries (Burundi, Democratic Republic of Congo, Zimbabwe), but relatively the unhappiest country is Russia with a score of minus 116 (51st according to wealth and 167^th according to happiness). And then follow Belarus, Latvia, Lithuania, Bulgaria, Estonia, Slovakia, Ukraine, Hungary etc.

And the Communists claimed that their goal is human happiness and heaven on earth.

Note: Correct answers to the test questions are intentionally not included in the text of the lecture. The reason is to motivate students in their additional self-study and partially (as revealed from the students’ responses and requirements) to make the test questions more challenging.