Does Income Measure Happiness?

Is economic well-being is accurately captured by traditional economic measures like per-capita income? This has long been a contested issue. Although everyone concedes that income is an imperfect welfare measure, conservative economists have tended to emphasize its virtues, while liberals have been more likely to stress its shortcomings. This debate is not just of philosophical interest; it also has important policy implications. Recent research findings offer support for specific arguments made on both sides. Mounting evidence suggests, however, that per capita income becomes a much less informative index of economic welfare when income inequality has been rising rapidly, as in recent decades. First a few words about how economists measure income. The simplest approach might seem to be just to add up everyone's income. But because one person's spending is another person's income, we can also estimate income by adding up how much everyone spends. And because spending turns out to be easier to keep track of than income, the most commonly used income metric is Gross Domestic Product (GDP), the annual market value of all final goods and services produced within a country. Per capita GDP is simply GDP divided by total population.