Date: 2024-12-21 Page is: DBtxt003.php txt00014145
MANAGEMENT METRICS
GROSS DOMESTIC PRODUCT (GDP)
GDP has been recognized as an inadequate measure of economic performance for a very long time.
GROSS DOMESTIC PRODUCT (GDP)
GDP has been recognized as an inadequate measure of economic performance for a very long time.
Original article: https://www.quora.com/Is-GDP-a-good-measure-of-economic-growth-Why-or-why-not/answer/Karel-Křesťan
Peter Burgess COMMENTARY
GDP has been recognized as an inadequate measure of economic performance for a very long time. Famously Robert Kennedy soon before he was assassinated gave a speech about this issue, and both Keynes and Kuznets understood the limitations of GDP … so the issue has been unresolved for the best part of 60 years or more! But there is more to this question than merely the technical measurement of macro-economic performance. I argue that our socio-enviro-economic system is not just about the money transactions, the profits and the financial wealth … it is about quality of life for people and the sustainability of natural systems and a host of intangibles. These are not measured with the same rigor that profit is measured, and stock market prices, and indeed GDP, but they ought to be. There also needs to be more clarity in national accounting about payments that are for long term investments and payments that relate to current costs of government. The terrible lack of investment (in infrastructure) by the US Government for decades is a terrible weakness, and the emerging tax reform bill does nothing to correct the major structural issues around current government finances and the measurement of economic performance! Peter Burgess http://truevaluemetrics.org
Peter Burgess
This question previously had details. They are now in a comment.
Karel Křesťan, University student Answered 14h ago
GDP is a logical way to measure economic growth and makes perfect sense, that’s why we are using it all the time.
I’ve already described it in a comment under one of my answers, but I feel like it might be interesting to show my point to more people.
Let me begin with describing GDP in the most simple, yet accurate way (if you know how GDP is calculated, feel free to skip my explanation, it is similar with macroeconomics books).
In introductory classes, we teach people that
GDP = C + I + G + NX (you can imagine how to get GDP per capita from this)
where C is Consumption, I means Investment, G means Government spending and NX is Net Export.
This is a pretty straightforward approach and makes perfect sense, right?
Consumption
By buying something from a domestic producer, you are giving him money. The more you buy, the more money you give him. For money he get from you, he can pay wages to workers, buy more material, pay his taxes and thus return money to the economy. This is how we produce wealth.
Investments (or Net investments to be accurate)
Buying new machines is in some sense similar to Consumption, except firms are spending, not households. Even better, this type of spending is creating more opportunities in the future.
Government spending
Government is spending for public goods and buying services for itself. By buying these services from a local producer, it returning money to the economy once more and thus helping the economy the same way Consumption and Investments do.
Please note that the logic behind C, I and G is pretty similar - generating wealth through spending money.
Net Export
Net export is calculated as NX = Export - Import. The more we export, the more money we get from trade. These money are used in our economy to generate wealth and we grow. BUT if we import goods from another country, these money leave our economy and cannot generate wealth. That’s why we should protect our companies from foreign competition - to reduce import and money loss.
As you can see, GDP is pretty simple to understand and quite accurate in measuring the wealth of a state. If you understand these basics, you can also understand many economic decisions of government.
Well, except GDP is a complete nonsense. And I will show you why (I would also like to say “Sorry” for such a long post) by showing how stupid Consumption and Net export is.
Net Export
“I was at Bordeaux. I had a cask of wine which was worth 50 francs; I sent it to Liverpool, and the customhouse noted on its records an export of 50 francs.
At Liverpool the wine was sold for 70 francs. My representative converted the 70 francs into coal, which was found to be worth 90 francs on the market at Bordeaux. The customhouse hastened to record an import of 90 francs.
Balance of trade, or the excess of imports over exports: 40 francs.
These 40 francs, I have always believed, putting my trust in my books, I had gained. But M. Mauguin tells me that I have lost them, and that France has lost them in my person.
And why does M. Mauguin see a loss here? Because he supposes that any excess of imports over exports necessarily implies a balance that must be paid in cash.”
The Balance of Trade from F. Bastiat.
Here I would only add one point from his other essay:
If you just send ships filled with goods to other country and sink it, you just increased GDP. Good boy.
Consumption
“Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—'It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?'
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.”
Essays on Political Economy/That Which Is Seen, and That Which Is Not Seen The Broken Window from F. Bastiat
The answer is already long enough, so I will add nothing more except one thing:
Please don’t believe macroeconomic indicators blindly.