GDP – Meaningless and Misleading?

GDP  – A destructive measure of economic growth.

 

 

Definitions

Gross Domestic Product, GDP, is used as a measure of a country’s economic output. It was devised as a measure for a specific type of economic analysis, but GDP per head has become widely used as an indication of the “standard of living” in a country.

GDP is “the total market value of all final goods and services produced in a given period” (usually over 1 year)

=

consumption + gross investment + government spending + exports – imports

(Gross because investment is “gross value, ie does not account for depreciation of capital items)

Gross National Product (GNP) slightly different in definition but now GDP is the standard measure.

Real” growth in GDP is adjusted for price changes

Flaws in GDP as a measure of “Standard of Living”

GDP per head is used as a proxy for Standard of Living

It includes “bads” as well as “goods” eg costs of repairs after accidents, medical care due to accidents and health effects of pollution, cost of travel imposed by lack of affordable housing near to work places, cleaning up effects of pollution etc etc

It discounts all value not part of the money economy – eg food preparation, child care, entertainment etc carried out within households and families.

This can lead to some distortion when making comparisons between countries at broadly the same stages of development (eg within Europe, the UK has more women in full time work than in other countries).

The value of leisure time is totally discounted – the UK has the longest working hours in Europe, USA even longer.

GDP can make comparisons meaningless between countries at different stages of development ie countries with a highly “professionalized” economy and subsistence economies where much food production, education for life skills, cleaning, social activities are done in the home or in the community.

Marilyn Waring proposes that unpaid work should be factored into GDP.

Comparisons between countries can be made on basis of current currency exchange rates (pretty meaningless at a time of changing values) or “purchasing power parity”, ie based on an attempt to allow for how much can be purchased in a given country. This is also fairly meaningless between countries with widely different ways of living and at different stages of development. (Mongolian peasant vs NY professional)

GDP is not good at accounting for the quality of goods – improvements or declines over time. This is difficult over a time of huge technical change – eg computing and information technology.

GDP doe not account properly for durability of goods. An item that provides good service over 15 years but has twice the unit cost of items which last for only 5 years gives a lower input to GDP than 3 of the less durable items.

GDP does not account for resource depletion. UK has run down oil and gas reserves without adequate investment to cater for future without this income. GDP does not account for environmental degradation – loss of tree cover, clean water, natural beauty, soil fertility.

Even if GDP were a meaningful parameter, GDP per head has been shown to have virtually no correlation with people’s happiness (measured by questioning people and by neurological scans of brain activity) once basic needs have been met. (Layard, Happiness – lessons from a new science)

People in USA where GDP per head increased by x2, and in Japan where it increased by x5 over a period of 40? Years are no happier

People’s feelings usually are affected most by their wealth in comparison with other people. It is not possible for everyone in a society to be near the top of the wealth distribution. Fred Hirsch, many years ago (The social limits to growth) used the concept of “positional goods”, which are goods or services in limited or finite supply. Any increase in GDP does not increase the supply of these. Such “Status” goods include antiques, old works of art, homes in the most desirable areas. Also, as wealth increases, the cost of owning the “Top” status symbol in any area increases in any area (cars, fashion, exclusive clubs, executive jets) whose price will escalate with increasing wealth within a country (or globally). Societies with smaller disparities between the richest and poorest have better health than those with large differences (regardless of the absolute level of GDP).

With building limited by planning restrictions (good for society as a whole), the price of housing increases to match increases in household incomes

Also, people who initially feel better off when their income or wealth increases become used to the new level of wealth, and cease to be made happier by it.

Why does this matter? Governments, particularly the UK (and its ex Chancellor) are obsessed about increasing GDP. This leads to pressure on everyone to be in paid work, when in many cases, society might be better off with more time for child care, family, support for vulnerable etc.

UK GDP has a large input from activities in City of London – much of which is parasitic and depends on an absurdly favourable tax regime.

We are wrecking the environment and rapidly depleting finite resources and making conflicts more likely pursuing a goal of increased GDP which is meaningless and fails to make us happier.

There are attempts to create alternative measures, eg the human development index, which as well as GDP per head, included life expectancy and educational levels. Bhutan has a target of “Gross national happiness” – may be more difficult to define objectively and pursue in a society like ours, but we need to think in terms of “Quality of Life”, not “Standard of Living”.

Robert Kennedy (JFK’s brother) said “The GNP includes air pollution and advertising for cigarettes, and ambulances to clear our highways of carnage. It counts locks for our doors and jails for people that break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and nuclear weapons. It does not allow for the health of our families, the quality of their education or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets. It does not include the beauty of our poetry, the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures everything, in short, except that which makes life worthwhile”