What is the Value of GDP as an Economic Measure? There are a few key components to this question. What needs to be determined is what GDP actually measures. This should be compared to the definition of the terms “economic measure” and “nation’s progress”. What Does GDP measure: According to Wikipedia “GDP is the market value of all officially recognized final goods and services produced within a country in a given period of time.”1 The GDP equation is: GDP = private consumption + gross investment + government spending + (exports − imports), where: Consumption = the market value of goods and services that people have consumed Gross investment = the value of what is being saved and consumption deferred, the value of assets that do not depreciate Government spending = the amount a government spends Exports – imports = what stays in the nation A couple of things come to mind when looking at this calculation: Market value can be defined as the price which someone is prepared to pay and the price which someone is prepared to part with the goods and services. Therefore “value” can only be determined when there is an overlap between these two criteria. As such, it is not clear as to whether goods or services produced but not consumed would not be included in the calculation. With the growth in complex financial instruments and complex accounting, it is not clear to me if Gross Investment would include or exclude investment in intangible assets like derivatives. Define “economic measure”: GDP is only one of many economic measures of a nation’s progress. Others include: Consumer spending Exchange Rate Gross domestic product GDP per capita GNP Stock Market Interest Rate National Debt Rate of Inflation Unemployment Balance of Trade2
“According to Wikipedia …” http://en.wikipedia.org/wiki/GDP This page was last modified on 30 March 2013 at 09:36. 2 “others include …” http://en.wikipedia.org/wiki/Economy#Economic_measures This page was last modified on 25 March 2013 at 19:16. 1
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Define “nation’s progress”: From the Australian Concise Oxford Dictionary: “Progress: 2. Advance of development to a better state.”3 To be able to determine a “nation’s progress’ using the definition of ‘advance of development to a better state we need a few things. Firstly we need to be able to identify areas in which a nation can make progress. Then we need to be able to quantify past state, present state and future state of these areas. Areas in which a nation can make progress: Economically Politically Culturally Access to and efficient use of energy and resources Access to and efficient use of leisure time Access to healthcare Access to quality education Infrastructure Research and development Sense of community/connection to something larger Population growth and demographics Legislation, law and policing Safety, security, life expectancy Town planning and living conditions This is not designed to be a definitive list. We need to compare what GDP measures to what we define as measuring a nation’s progress. When we compare what GDP measures with the list of areas that might determine a nation’s progress we can see both overlap and underlap. Overlap: The theory when suggesting that GDP is a measure of a nation’s progress is that if a nation produces more than it did last year then that nation’s citizens would benefit from increased employment, increased salary/share of profit, increased dividends from the nation’s share market etc. To illustrate where there is overlap, let us consider one particular area as an example. Let’s suggest that we agree that improving the quality and quantity of education will help a nation progress. In order to improve the quality and quantity of education there will need to be investment, government spending and consumption of things such as schools, teachers, books, universities, corporate education and other educational infrastructure. All this activity will show up in a calculation of GDP. This logic can be extended to many areas in which a nation can make progress.
3
The Australian Concise Oxford Dictionary, 1987, Oxford University Press, Melbourne.
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Underlap: What GDP does not measure is the effort, stress and cost of producing GDP. For example, there is, perhaps, an increased level of stress associated with insecurity of employment as we move to contracts and part time arrangements. This stress will be showing up in an increased need for healthcare. It does not measure the value of what was produced. You could have a massive increase in GDP because the government ‘invested’ in middle class welfare that was then spent on flat screen TVs. It is questionable whether increasing the quality of the screen with which we watch infinite cooking shows actually progresses a nation or not. There is also an assumption that more is better. Just because we are spending more or even generating more does not necessarily mean we are progressing. To continue the education example from above: perhaps we are investing in educational infrastructure where what might be holding us back as a nation could be students’ and parents’ attitude towards education. So, what is the value of GDP as an economic measure of a nation's 'progress'? As soon as you try to measure something as intractable and complex as a ‘nation’s progress,’ no one measure will be sufficient. So if the question had been “What is the value of GDP as the measure of a nation’s progress” the answer would clearly be something along the lines of “close to useless.” However, the question is “what is the value of GDP as an economic measure of a nation's progress?” As such I would suggest there is value in measuring GDP and including it in a basket of measures to determine a nation’s progress.
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