Nina's Reading Blog

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Posts Tagged ‘GDP’

GDP: A Brief But Affectionate History

Posted by nliakos on May 14, 2017

by Diane Coyle (Princeton University Press 2014)

I have never studied economics, if you don’t count a MOOC I did a couple of years back with Dan Ariely (but behavioral economics seems more like psychology than economics). So I am one of those people clueless about the difference between GNP and GDP. I had never heard of things like FISIM (financial intermediation services indirectly measured), the ISEW (Index of Sustainable Economic Welfare), an IBSC (imputed bank service charge), the SEEA (System of Environmental Economic Accounting), or the SNA (System of National Accounts). In fact, I had never even heard of “national accounts”. I didn’t know what the OECD (Organization for Economic Cooperation and Development) was, for heavens’ sake.  So although this little book was written for non-economists, I still found it slow going, and at the end I can’t say that I understood very much or very well.

But my takeaway is this: GDP (Gross Domestic Product) is a way of calculating the amount of production of tangible items (like steel or cars or rice or TV sets) that was invented (or revised) during the Second World War. Economists do not all agree on how to calculate it. In any case, its accuracy depends on the completeness and accuracy of the data used to calculate it, and often, especially in the developing world, complete and accurate data are just not available, so the resulting GDP figures are suspect. (In a section entitled “Is Africa Poor?”, Coyle gives the example of Ghana, which was suddenly transformed from a low-income nation into a low-middle-income nation in November 2010, simply because Ghana’s statistical agency had updated its calculation of the price index, increasing GDP by 60 percent [but changing nothing about the economic reality of the country].)  So we should take GDP figures with a large grain of salt.

Another reason to consider GDP with suspicion is that it is concerned only with material output (i.e., “goods”), and not at all with services. In today’s developed economies, the service sector is huge. Yet there is simply no good way to measure the productivity of government or other office workers, artists, teachers, doctors, scientists, restaurant servers, X-ray techs or hotel clerks. Moreover, GDP does not take into account sustainability, innovation, variety, global production chains, or “intangibles” (such as the volunteer efforts which create and constantly improve Wikipedia or Linux), and it does not take variations in quality into account.

And perhaps we shouldn’t give so much importance to GDP anyway, as opposed to measures of well-being (“welfare”). Think of the catastrophe that was the Chinese Cultural Revolution, when poor Chinese peasants stopped farming in order to produce steel, and millions starved. And the steel wasn’t even usable. Isn’t our satisfaction with our lives more important than the number of widgets we produce?

But Coyle stops short of suggesting we get rid of GDP. She points out that there is no viable alternative to it for measuring economic growth. In addition, GDP growth appears to be linked to increased social welfare, even though they are separate concepts. She thinks we should supplement GDP with other indicators (she particularly feels that we need to develop a way to measure sustainability), find a way to measure unpaid household work and “the informal economy”, and modernize the way we collect the statistics used in calculating GDP, among other recommendations. As many nations tilt away from physical output to service economies, the very concept of “economy” is changing and needs a new definition. Until that happens, GDP will continue to be a significant part of how people evaluate the economies of the world.

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