The GDP is a grossly defective product. We need to knock it off its pedestal

It is the economic ring of rings, the number that rules all. Gross domestic product is the measure that preoccupies policymakers and obsesses markets. Traders fine-tune their predictions of Federal Reserve policy based on expectations about GDP’s performance. Nowcasters seek to provide real-time estimates. And yet, more than ever, it is apparent that this economic lodestar is a treacherous guide.

Consider the controversy over how the Japanese economy performed in 2014. According to official figures, GDP declined by 0.9 percent. But a recent Bank of Japan study, which drew on alternative sources of data, found that it had expanded by 2.4 percent.

Another case in point: The recession in the United Kingdom in the early 1990s appeared grave at the time, with GDP slipping from its peak to trough by 4.3 percent. The figures now reveal a decline of only 2 percent. Which was the truer picture: The reverse experienced and countered by policymakers using definitions and data available at the time, or the milder one airbrushed by subsequent revisions?

Such discrepancies corrode confidence in GDP as a measure of economic health. More generally, a seemingly endless string of revisions raises questions about how differently policymakers might have behaved  on the basis of revised estimates. Two years ago, there was alarm in the euro zone as an already-faltering recovery stalled in the second quarter of 2014. The halt in growth was one reason the European Central Bank gave for moving toward quantitative easing in early 2015. Yet, according to the latest figures, the euro zone actually grew by 0.2 percent in the second quarter of 2014, a feeble but less dispiriting performance.

GDP is measured both quarterly and annually by calculating the inflation-adjusted sum of value added in an economy. That number can be compared with estimates of potential GDP to assess whether economies are operating at, below or above capacity.

Yet despite its theoretical appeal, GDP is, in practice, a fallible measure – and increasingly becoming one that could be described as a grossly defective product.

For one thing, the number shifts as more complete, up-to-date data becomes available. For another, national accountants change their definitions and approaches to better reflect the changing shape of the economy, such as the recent inclusion of research and development as investment.

A deeper concern is that the concept of GDP – a measure of output within an economic territory is becoming less and less relevant to the way economic activity is actually conducted. Devised in an era of largely closed industrial economies, GDP is much harder to estimate in today’s more open service-dominated economies. In particular, determining where value is really added becomes far trickier as multinationals use global supply chains to exploit intellectual property and move business around to minimize taxes.

It is no accident that GDP figures for Ireland have become distorted beyond recognition because the country’s small, open economy attracts American multinationals lured by its low corporate tax rates. An upward revision in economic growth would normally be welcomed, but the increase reported this summer in Irish GDP prompted disbelief. Official number crunchers rejigged the increase in 2015 GDP from an already-rapid 7.8 percent to an extraordinary 26.3 percent. Rather than embellish Irish economic performance, the revision brought the GDP number into disrepute because it merely reflected the fact some big companies had relocated some business to Ireland. Nothing fundamental had changed, except that Irish debt – typically (and misleadingly) expressed as a share of GDP – suddenly looked less onerous, falling from 108 percent of GDP in 2014 to 79 percent in 2015.

Even more fundamentally, GDP falls increasingly short of reflecting the digital age. Internet giants such as Facebook provide their services free, but GDP excludes zero-priced products. More and more people book travel online rather than through an agent, yet their efforts do not count toward GDP any more than other unpaid work in the home. And beyond the difficulties of measuring the contribution of digital products to GDP, the demarcation of economic activity by national boundaries is increasingly obsolete in a digital world.

The shortcomings of GDP as a gauge of economic welfare are longstanding, however. Half a century ago, Robert Kennedy deplored closely related gross national product (GNP) as measuring everything “except that which makes life worthwhile.” Today, China’s dash for GDP growth, promoted by targets, has taken a severe toll on the health and quality of life of the Chinese people through air and water pollution.

It’s time to knock GDP off its lofty pedestal. China should abandon its pernicious growth targets. Investors, as well as policymakers, should embrace the  data revolution to find new and better ways to measure the pulse and health of economies. On the eve of the new millennium, GDP was celebrated as one of the great inventions of the 20th century. The trouble is precisely that: It is so last century.

Paul Wallace is a London-based writer. A former European economics editor of The Economist, he is author of “The Euro Experiment”, recently published by Cambridge University Press. This article was first published by Reuters.

Share this:

Arts & Entertainment

Arts & Entertainment

Damian Marley’s deep love for Africa

24th May 2017 Staff Reporter 0

Damian Marley’s 2010 collaboration album with Nas, Distant Relatives is littered with references to Africa’s rich cultural background. During the recording of the album Marley and Nas dug through archives of African music in search […]

22 Comments on The GDP is a grossly defective product. We need to knock it off its pedestal

  1. whoah this weblog is magnificent i really like reading your
    posts. Keep up the great work! You already know, many individuals are searching around for
    this info, you can help them greatly.

  2. My partner and I absolutely love your blog and find almost all
    of your post’s to be exactly what I’m looking for.
    Would you offer guest writers to write content for you personally?

    I wouldn’t mind producing a post or elaborating on a number of the subjects
    you write in relation to here. Again, awesome blog!

  3. Hey there! This is kind of off topic but I need some
    guidance from an established blog. Is it very difficult to set up your own blog?
    I’m not very techincal but I can figure things out pretty fast.

    I’m thinking about creating my own but I’m not sure where
    to start. Do you have any tips or suggestions? Appreciate it

  4. I do trust all the concepts you have presented in your post.
    They’re very convincing and can certainly work.
    Still, the posts are very quick for newbies.
    Could you please lengthen them a little from next time?
    Thank you for the post.

  5. Hello, I do think your blog could possibly be having web browser compatibility problems.

    Whenever I look at your blog in Safari, it looks fine however when opening in I.E.,
    it has some overlapping issues. I just wanted to provide you with a quick heads
    up! Besides that, excellent website!

  6. I think what you typed made a bunch of sense.
    However, think on this, what if you added a little information? I mean, I don’t
    wish to tell you how to run your website, however suppose you added a
    headline that makes people want more? I mean The GDP
    is a grossly defective product. We need to knock it off its pedestal –
    The Zimbabwe Mail is a little vanilla. You should peek at Yahoo’s home
    page and see how they create article headlines to get people to click.
    You might add a related video or a picture or two to grab people excited about what you’ve got to say.
    Just my opinion, it would bring your blog a little livelier.

  7. Excellent beat ! I wish to apprentice at the same time
    as you amend your website, how can i subscribe for a weblog web site?

    The account helped me a applicable deal. I have been tiny bit acquainted
    of this your broadcast offered bright clear concept

  8. My coder is trying to convince me to move to .net from PHP.

    I have always disliked the idea because of the expenses. But
    he’s tryiong none the less. I’ve been using Movable-type on a number of websites for about a year and am concerned about switching to another platform.
    I have heard good things about Is there a way I
    can import all my wordpress posts into it? Any kind of help would be greatly appreciated!

  9. An intriguing discussion is definitely worth comment.

    I do believe that you should write more on this subject, it may not be a taboo matter but
    generally folks don’t discuss these topics. To
    the next! All the best!!

  10. Hey would you mind letting me know which webhost you’re utilizing?
    I’ve loaded your blog in 3 completely different web browsers and I
    must say this blog loads a lot faster then most. Can you
    suggest a good internet hosting provider at a reasonable price?
    Cheers, I appreciate it!

  11. Hello, Neat post. There’s a problem along with your site
    in internet explorer, could check this? IE nonetheless is
    the marketplace leader and a good part of other folks will miss your fantastic
    writing because of this problem.

  12. I¡¦ll immediately clutch your rss feed as I can’t to find your e-mail subscription link or e-newsletter service. Do you’ve any? Please allow me recognize in order that I may just subscribe. Thanks.

  13. Heya this is somewhat of off topic but I was wondering if blogs use
    WYSIWYG editors or if you have to manually code with HTML.
    I’m starting a blog soon but have no coding skills so I
    wanted to get guidance from someone with experience.
    Any help would be greatly appreciated!

  14. Hi superb blog! Does running a blog like this take a lot of work?
    I’ve absolutely no understanding of coding however
    I was hoping to start my own blog soon. Anyway, should you have any ideas or tips
    for new blog owners please share. I understand this is off topic but I just
    wanted to ask. Cheers!

  15. Thank you for some other informative site. The place else could I am getting that type of
    info written in such a perfect approach? I’ve a mission that I’m just now
    running on, and I have been at the look out for such info.

4 Trackbacks & Pingbacks

  1. Africa’s jobless youth cast a shadow over economic growth - Zimbabwe Consolidated News
  2. Google
  3. Google
  4. Old economics is based on false ‘laws of physics’ – new economics can save us – 263AfricaNews

Leave a Reply

Your email address will not be published.