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
    0

    Comment number 98.

    JfH@97
    "real logic"

    That real logic is in the end of power, not just of some banks 'too big' but of most majors being inter-linked, and of most if not all countries big or small necessarily 'to be rescued' by their creditors & benefactors & vulture capital. Given such 'logic', even in the most 'extraordinary conditions', markets will continue to feel able to function, albeit with gyrations. Q? A?

  • rate this
    0

    Comment number 97.

    94.fd " It "(2)

    The ONLY real logic is that of the market system, of labour & of capital.

    Currently capital is systemically broken - in their parlance the code word is 'extraordinary' monetary conditions.

    Before anything can be returned to normality money must become 'ordinary' again.

    As I have so often written money(capital) has to be positively priced. No solutions until this is again true.

  • rate this
    0

    Comment number 96.

    94.fleche_dor " It follows logically..."

    Nope - what you haven't sufficiently grasped is that all economic statistics are just a front to prevent anyone being able to notice that the banks are totally and irretrievably bust - so the logic you seek is a different logic - it is the logic of necessary denial.

    So long as the parcel passes quickly enough they think it will be OK - they are wrong.

  • rate this
    0

    Comment number 95.

    SJH@92
    The balance of trade or more specifically the current account IS a matter for concern.
    The UK runs a large deficit on goods and a surplus on services but overall a substantial net deficit.
    It means we are not paying our way in the world.
    The issue is recognised by the present Government which aims to increase exports to £1b by 2020 as part of its Economic Plan.
    Alan

  • rate this
    0

    Comment number 94.

    Mankind exerts pressure on all finite resources. It follows logically that a new Sustainable GDP should be calculated. GNP & GDP are calculated in parallel. Why not SusGDP too?

    Professor Tim Jackson, Surrey University initiated vital work on Sustainable GDP measures. Funds' absence, institutional changes; RDA's demise means UK lost momentum somewhat.

    Vital efforts can and should be pursued.

  • rate this
    0

    Comment number 93.

    SJH@92
    "explain
    export figures"

    Many will "explain" our economic management, rather as the BBC must "explain (by Charter & Agreement) the workings of British Parliamentary democracy", with no reference to real democracy or even its emulation, insight as to it actual purpose left to dawn only slowly in the minds even of principal actors, maybe never in most 'subjects', unequal under fear & greed.

  • rate this
    0

    Comment number 92.

    I may be dim but I still do not understand why the export figures, which are breathtakingly bad, seem to attract little more than a passing glance and trouble no one but the gdp figures seem all important.

    Presumably somebody here can explain this.

  • rate this
    +1

    Comment number 91.

    It won't work, no matter what new measurement the gov brings in to replace GDP because the system is rigged and corrupted.

    Unfortunately, real solutions always come after crisis.

  • rate this
    +1

    Comment number 90.

    Whit all bets off banks could lend trillions in government guaranteed deposits to anyone they wanted to,They gave easy credit to anyone credit worthy. That's how lenders make money for themselves. When they ran out of credit worthy borrowers they invented an ingenious idea, they would lend money to people who weren't to by houses, chop up and repackage these "instruments" CDOs, CMOs, and sell them

  • rate this
    +1

    Comment number 89.

    FDIC and FSLIC were created to prevent runs on banks.Commercial and Savings banks had strict lending rules. In return the US government guaranteed no one would ever lose money depositing in one. Then they lowered the ceiling to 100,000 per person per bank. Even so, trillions in profits piled up. When Glass Steagal was repealed that money became available for wild speculation. More next posting.

  • rate this
    0

    Comment number 88.

    87.Solon2100

    Yup - well one of them...

    The real problem was clear to everyone when politicians started saying that there is a new economic paradigm and they had abolished boom/bust. Politicians are completely ignorant themselves so some economist must have told them to say these things.

    The capitalist market system been working for 3000 years & it needs money to cost something -or it fails.

  • rate this
    0

    Comment number 87.

    86John from Hendon, when I heard news on my car radio that Alan Greenspan advocated repeal of Glass-Steagall I nearly lost control of the steering wheel.Congress passed it, Clinton signed it, I figured these guys must know what they're doing.They wanted to be free to compete with European banks...and they did, right into bankruptcy.Glass Steagall was the bulwark that prevented another depression.

  • rate this
    0

    Comment number 86.

    82.Solon2100

    Everyone of them did therefore know better! They knew that the economics that they were taught said that they should not be doing the things they were doing as it ALWAYS completely destabilizes the capitalist system. So what they did was to 'pay for' a different tune from the piper & so the global banking system crashed as they were taught it would.

    Totally intellectually corrupt!

  • rate this
    0

    Comment number 85.

    M_T_Wallet@83
    "great loss"

    Robert Kennedy. Thanks for gem.

    But note ambiguities, for many the sweeteners: 'health (physical, mental, social) of our children (whose exactly), quality of their education (jest), joy of their play ('til reality hits), beauty of our poetry (& good-guy films), strength of marriages (not entrapped), intelligence of public debate or integrity of our public officials...'

  • rate this
    0

    Comment number 84.

    A housewife who takes a job and has another housewife mind her children for pay has generated measured GDP although nothing may have changed. Since the 1950's this has been happening steadily as women have moved from unpaid work to paid work. A rough estimate suggests that his could have added 1% pa to GDP. No wonder GPD is growing more slowly now that women participate fully in the workforce.

  • rate this
    0

    Comment number 83.

    This man probably best summed up the limitations of GDP.

    A great loss.

    http://www.theguardian.com/news/datablog/2012/may/24/robert-kennedy-gdp

  • rate this
    -1

    Comment number 82.

    68John From Hendon let me enlighten you.Top bankers come from the ranks of economists.Their top execs and advisors are economists.The regulators who recommend the rules and advise legislators what laws to pass governing the financial industry including bankers are economists.Every one of them has an MBA at the very least.Bernanke was supposed an expert on the depression.He helped recreate it.

  • rate this
    0

    Comment number 81.

    alan @80
    "classicists
    bright"

    While economists ponder changes in aggregate direction at the centre, historians gather sense of the parties in more recent see-saw, and classicists rely for perspective on the forces in-play, tending if not aways to 'back the usual winners' at least to see potential outcomes, if not to cater for conscience at least to cover their own backs, like the GDP to survive.

  • rate this
    +2

    Comment number 80.

    Economists have relatively little clout in the UK.
    Most of the top people in the Treasury, the BoE and the Civil Service are classicists.
    They tend to be genuinely bright.
    If you can "do" Ancient Greek, economics is a walk in the park and physics is a book before bedtime.
    Alan

  • rate this
    +1

    Comment number 79.

    Following JfH@68, it is ironic that GDP economists seem generally amongst those most in need of reminding: "He who pays the piper calls the tune". This not especially true of their calling, or to say that amongst priests may not come a Darwin or a Mendel, a Keynes or a Galbraith, a reforming Francis or an informing Snowden: but they come by spark & often scarred. More to come than Linda's "tried".

 

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