Is GDP the least worst alternative?

 

Measuring a country's economic performance is an inexact science, says Linda Yueh

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.

No domestic

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.

Yuan, euro and US dollar notes

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.

a view of Eggborough Power Station

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.

Alternatives?

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?

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    +1

    Comment number 18.

    17 "can anyone audit these fictional figures"

    Ahhh? Firstly it is an estimate based on provision of data from range of sources. Can be manipulated by the state (as has happened in Argentina recently) but in UK govt agencies which compile numbers have integrity.

  • rate this
    -2

    Comment number 17.

    I didn't realise the full and uncertain scope of GDP or GNP until I read this excellent article from Linda.
    I guess it illuminates that well known phrase....there are lies, damned lies and...statistics.
    In this partcular case how can anyone audit these fictional figures?
    Anyway, it's all academic now, countries just print money!

  • rate this
    0

    Comment number 16.

    @8.SJH
    .. I paint your house and you do my garden and we will have boosted GDP

    its a measure of economic activity & that's economic activity.
    the real problem is Govts & some economists turn it into a mystical quantity to be worshipped

    an example I use to use was you can turn recession to gdp growth by nationalising a mobile phone company & passing a law making everyone buy a new phone from it

  • rate this
    0

    Comment number 15.

    "balance of payments &/or trade"

    Became less relevant with floating currencies. However, UK trade deficit is pretty regular occurence & hard to shift bec 2 major surplus countries in which UK trades - China and Germany - do not freely float their currencies. Euro floats but this is undervalued relative to fundamentals in Germany.

  • rate this
    -2

    Comment number 14.

    As far as inexact figures go I reckon that "Zero Hours" employment contracts take the biscuit.

    At one fell swoop rendering unemployment figures worthless.

    This is what the government does. Manipulate figures so they are meaningless.
    All done to keep the banking economy going.
    So everyone can keep the money go round turning.
    Faster.

    Next they will legitimize the black economy
    Partially of course

  • rate this
    +2

    Comment number 13.

    Gross value added (GVA) + taxes on products - subsidies on products = GDP
    The most useful calculation for GDP in general discussion is expenditure method which the article ignores (Investopedia agrees with me)
    GDP=C+G+I+NX
    where C is consumer spending, G is Govt spending, I is business spending (investment) & NX is net exports
    neo-liberals tend to ignore this calc though because it shows them up

  • rate this
    -1

    Comment number 12.

    'Measuring a country's economic performance is an inexact science, '

    Nope there is nothing at all sceintific about it.

    GDP - an manipulated measure of some indicative manipulated measures.

  • rate this
    0

    Comment number 11.

    I seem to remeber when I was young the primary economic figure quoted on the news was balance of payments &/or trade, we measured the success of the economy by how much stff we sold to other countries (net). GDP is useful but only in conjunction with other measures & Govts trying to get good GDP figures distorts the economy & is inclined to create bubbles

  • rate this
    +2

    Comment number 10.

    The three methods of measuring GDP are "income and output and value added"?

    What is the difference between the output and the value added variants?

    And what about the "expenditure" method?

  • rate this
    0

    Comment number 9.

    ....and illicit drugs add £10bn per year.

    That's not to be sniffed at,....
    .
    Possibly not the best metaphor to use ?

  • rate this
    -1

    Comment number 8.

    5. John_from_Hendon

    Interesting.

    What do GDP figures mean anyway. You sell me your house and I sell it back to you, I paint your house and you do my garden and we will have boosted GDP but added absolutely nothing of value to the national economy and little to our own.

    It is exports that count and they stink. Your Aunt will be turning in her grave. GDP figures are just the latest fad.

  • rate this
    0

    Comment number 7.

    Fine review, lucid comments. Taking the economic temperature, local, national or continental, may be critical for investment, by governments for 'balance' of some kind, by individuals wondering where to live & work, as well as for commerce seeking profit short-term or long. We get used to 'whatever', but agreed equal partnership needed for stability & meaning of 'measure' & conscience in decision.

  • rate this
    -1

    Comment number 6.

    Linda , when your colleagues all troop down to the BoE to sit spell bound by the Governors forecasts and predictions,please remind them of this article and tell them that you could come up with figures no less meaningful than he will.

    And,

    Its not just GDP its every economic marker as you allude to...

    the whole financial system has been manipulated by bogus maths and needs a complete reset.

  • rate this
    +2

    Comment number 5.

    Time for my aunt's story...

    She was a statistician the senior one at the Board of Trade in fact (1st in her year at Cambridge, girls were awarded degrees - died 6 months before they gave them out) . She point blank refused to include invisibles in the 'trade' figures (when she retired they included invisibles).

    GDP is only a number and not a 'fact' at all! Journos like it as it makes a story!

  • rate this
    0

    Comment number 4.

    If I charge my neighbour £20 to paint his garage and he paints mine for the same, it adds £40 to GDP. That is how useless it is.

  • rate this
    0

    Comment number 3.

    When mark to market is mark to fantasy and currency is totally debased by the very institutions that should nurture its value GDP becomes little more than a distorting mirror in measuring economic health and performance. We know there is solid bedrock in the economy somewhere but it is hidden by layers of dross that should have been and should be allowed to fail.

  • rate this
    0

    Comment number 2.

    1 - corollary - despite the most amazing spin, ever, this is exactly the lesson of Fukushima. Admittedly a natural manmade disaster.

    For twenty years we are messing about with energy and now insane is bland. The people who built these things knew what they were doing.

    The matter must be looked at again because no sane person would take this risk.

  • rate this
    -1

    Comment number 1.

    The World Bank attempted to create an alternative Green GDP, where environmental damage is included in calculations of national output.


    Aging nuclear reactors are to be run on. If they were aircraft, this would not be allowed. People would be in jail.

    I am pro nuclear energy.

    Here's the problem. If one reactor fails, all must shut down.
    End of UK economy.

    Insane risk

 

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