Is GDP the least worst alternative?
- 16 July 2014
- From the section Business
A data release consistently noted for its importance among businesses, GDP has come under scrutiny and was recently overhauled for major economies.
Is it still a useful measure?
Well, when we want to assess our job prospects, we want to know how the economy is doing. The main ways of measuring economic activity are to add up all our incomes and what firms produce.
These are the different versions - the income and output variants - of GDP, or gross domestic product. For the more wonky, there is a third version which aggregates the value-added of each sector of the economy.
And if you wanted to know what the nationals of your country produce regardless of where they live and exclude the non-nationals, then that computation is known as GNP or gross national product.
For most countries, the two - GDP and GNP - are virtually the same. There's less than 2% difference between GDP and GNP for the US, for instance.
As you can imagine, it's tough to measure everything.
So, non-paid work that adds to a society's welfare like domestic work is not included. But, other activities, including illicit ones - like prostitution and drugs - are.
In an overhaul to the way that GDP is measured, the UK estimated that prostitution and illicit drugs add £10bn per year.
That's not to be sniffed at, as it amounts to 0.7% of GDP. The Italians thinks that such activities could add even more, 1.3% to their GDP. So, perhaps more illicit activities there, then?
In any case, for developed economies that are growing at 1-3% per year, these are big additions.
Paid in cash
But, if welfare-enhancing output isn't included because it's not enumerated but dodgy ones are because money changes hands, isn't that a rather limited way of assessing what the output of a country really is?
Plus, you're probably wondering how law-breaking activities are even measured.
After all, it's not as if drug dealers are filing tax returns. It's not just them - there's rather a lot of mis-measurement in the data as firms can file late or individuals don't declare everything that they earn.
Recall the last time when your builder asked to be paid in cash? So, there's a bit of statistical extrapolation, particularly in estimating illicit activities.
At least they're trying to measure those. How income is spread among people or the distribution of income isn't accounted for at all.
So, if one person made all of the income and no one else made anything, then that would be the same as a perfectly equal society in GDP terms. Also, activities that damage the economy such as pollution aren't part of GDP either.
So, not counting everything, not measuring what matters, and not being able to accurately count the activities that are taking place - these don't bode well for GDP as a form of measurement.
But, what's the alternative?
The World Bank attempted to create an alternative Green GDP, where environmental damage is included in calculations of national output.
By that gauge, China's growth doesn't look as spectacular. But, the estimations rather than actual measurements are considerable.
It's the same with other attempts. Bhutan has created a Gross National Happiness index which seeks to measure welfare and not income or output. But, happiness is subjective and when I say that I'm happy, it's unlikely to be the same as when you say that you are.
To sum up, GDP is by no means a perfect measure. But, is it - paraphrasing Winston Churchill on democracy - the worst form of measurement except for all of the others that have been tried?