Meeting challenges in measuring GDP

Even in good financial times, development aid budgets are hardly overflowing. Government leaders and donors must make hard decisions about where to focus their limited resources. How do you decide which countries should get low-cost loans or cheaper vaccines, and which can afford to fund their own development programs?

The answer depends, in part, on how we measure growth and improvements in people's lives. Traditionally, one of the guiding factors has been per capita GDP the value of goods and services produced by a country in a year divided by the country's population. Yet GDP may be an inaccurate indicator in the poorest countries, which is a concern not only for policymakers or people like me who read lots of World Bank reports, but also for anyone who wants to use statistics to make the case for helping the world's poorest people.

I have long believed that GDP understates growth even in rich countries, where its measurement is quite sophisticated, because it is very difficult to compare the value of baskets of goods across different time periods. In the United States, for example, a set of encyclopedias in 1960 was expensive but held great value for families with studious kids. (I can speak from experience, having spent many hours poring over the multi-volume World Book Encyclopedia that my parents bought for my sisters and me.) Now, thanks to the Internet, kids have access to far more information for free. How do you factor that into GDP?