Debate: Is GDP a true and accurate measurement of growth?

Sunday 31 July 2016

A new book, The Great Invention by Ehsan Masood, unveils the genesis of the Gross Domestic Product (GDP) and how it shaped the modern economic paradigm. It comes at a time when a growing number of people are questioning this flawed metric. Is GDP a true and accurate measurement of growth? Exclusive excerpts from the book, followed by a cross-section of views on the efficacy of GDP

The only hint of caution that morning came, ironically, enough, from Green-span {Alan Greenspan, former chairperson of the US Federal Reserve Boa-rd}. This was still some years before the crash of 2008, and the Federal Reserve Board chairman was at the height of his powers and regarded as the chief architect and steward of America’s see-mingly unending run of prosperity. “I cannot say what the size of the economy will be 1 year from today or 100 years from now,” Daley joked {former US commerce secretary}. “But I can say that when we reach the next milestone—$10 trillion —will depend a lot on… Chairman Greenspan.”

Amid the celebrations, however, the Federal Reserve Board chairman had a warning for his audience. In the very mildest of terms, he said that it would be wrong to conflate GDP with quality of life, and he cautioned that an increase in one did not necessarily mean an increase in the other. Just because a country such as the United States has high rates of economic growth, it doesn’t automatically mean it will enjoy a high quality of life, Greenspan said. To illustrate what he meant, Greenspan asked his audience to compare how people in the northern states cooled themselves during the summer months compared with folks in the South. While the northern residents were fortunate to enjoy cool sea breezes, those down south had to turn up the air-conditioning. While both, you could say, enjoyed an equally high quality of life, in GDP terms, the air-conditioning group would come out on top. “The wonderful breezes you get up in the northern Vermont during the summer, which eliminates the requirement for air conditioning, doesn’t show up in the GDP,” Greenspan added.

Greenspan was correct. GDP is neither a measure of welfare nor an indicator of well-being. That is because it is not set up to recognize important aspects of our lives that are not captured by the acts of spending and investing. There is no room in GDP for volunteering or housework, for example; nor does it recognize that there is value in community or in time spent with families. More measurable things such as damage to our environment are also left out, as is job satisfaction. GDP doesn’t even measure the state of jobs.

Greenspan’s was by no means a lone voice cautioning against reading too much into GDP beyond what it says about the state of production, or spending, or incomes. From the earliest days, its inventors, including Simon Kuznets and the British economist John Maynard Keynes, understood that it is not really a measure of prosperity, and Kuznets in particular become skeptical of the way in which his invention was being used as a proxy for this. As far back as 1922, the English banker and statistician Josiah Stamp questioned why national income did not include the value of housework or volunteering and remarked that the trend seemed to be to value those things that are important to rich people.

Today, such voices have been joined by many more, including the leaders of the developed and developing nations. Together with government ministers and civil servants, academics, campaigners, and business folk, they recognize that GDP has strengths but also flaws, and they want change. But they cannot agree on what could or should change, and they are even less certain about how change could happen.

AND THE DEBATE...
 
Never heard about GDP

I have never heard about GDP. Our world is confined to our daily income, which is decreasing by the day.

In the last 45 days, I could get work for only seven days, and earned Rs 6,000.

I live under the Sarai Kale Khan Bridge along with my nine-member family, including three children and three women. Earlier, only men from our village worked as migrant labourers to support the family income. Now women are also working. Men are paid Rs 400 per day and women earn Rs 300 at construction sites in Noida. It is our only source of income.

We own about 0.8 hectares of land in our native village. But due to water scarcity and drought, we migrated to Delhi. We are eagerly awaiting the monsoon, so that we can return to our village.
 
It is the least ªinaccurateº method

When former president A P J Abdul Kalam was in the Central Board of Directors of the Reserve Bank of India, he posed a question to the then governor, Bimal Jalan, during a meeting: “What is this GDP business? Sometimes it goes up and sometimes it goes down?” Jalan responded in a lighter vein:

“If you hire a maid servant and pay her salary, the GDP will go up. But if you get married to the maid servant and stop giving her salary, then the GDP will go down.”

GDP is not the perfect way to measure growth. But among the alternatives, it is the least “inaccurate” method to compute the growth rate of the country. Goods and services which cannot be valued at market prices are not included. This is the first major lacuna. Take for instance the household services of housewives. They are not paid for the services, but the value of the work they are generating is not accounted.

Let’s take the second lacuna. If the vegetables and fruits a farmer is growing in his/her garden are for domestic consumption, it is not added to the GDP. Does that mean the farmer has not added value? This means all value additions for self consumption, which are not put out in the market, are not accounted in the GDP.

One alternative that has been much discussed is the Gross Domestic Happiness (GDH).

It emerged in Bhutan. However, it is based on an extensive survey and is a subjective indicator. It lacks objectivity.
 
Important to qualify the GDP

There is a close linkage between the growth of output and the growth of income, but it is not exact. There are situations where the two can differ significantly. For instance, think of a situation where the energy efficiency of the production process improves because of technological progress. This means that the same level of output can be produced with less energy being purchased. As a result, the growth rate of output will be zero, but the growth rate of GDP will be positive.

This distinction is important in assessing the appropriateness of GDP as an indicator of growth. Output in itself does not necessarily contribute to human well-being. What does contribute very significantly is the income generated in the process of production. The GDP is, by far, the most comprehensive measure of income that exists today, and is therefore central to any measurement of growth.

Having said this, it should also be acknowledged that the GDP gives no indication of either the distribution or the sustainability of income growth. As a result, a high rate of GDP growth can easily be associated with higher inequality or with serious degradation of natural resources. There are efforts to address these lacunae through concepts such as “inequality-adjusted GDP” and “green GDP”. The important thing to note, however, is that in all these efforts the objective is to qualify the GDP, and not to replace it.

The only genuine alternative to GDP as an indicator of growth is to measure the change in the asset base of the economy. In this approach, assets should be defined not as financial assets, but in the most comprehensive possible way, including physical, natural, human and intellectual assets. The difference between the change in assets and GDP is that the former measures the potential growth of the economy, whereas the latter measures actual income growth. Conceptually, this is a very attractive alternative, but its data needs are formidable and simply not possible at the current state of play.
 
Dragging ourselves towards ecological oblivion

GDP is a deeply flawed measure of economic progress. It has three large problems: It miscounts costs as benefits. Money spent to fix damage, as from strong weather and human accident, adds to its bottom line, though these are costs we seek to avoid, not benefits we want to increase. It ignores many costs, as when it overlooks the healthcare costs and early deaths wrought by air pollution or the decreased productivity, poorer health, lost sleep and lost life pleasure caused by noise pollution. It doesn’t count some economic values at all, such as the benefits we get from volunteer work, do-it-yourself household production and barter.

Simon Kuznets, the economist who led the development of GDP’s precursor statistic, Gross National Product, warned against mistaking it for a measure of general economic wellbeing. It’s an estimate of the nation’s gross monetary transactions, nothing more. As every businessperson knows, an enterprise stands or falls on its net, not its gross. Because climate change and other environmental catastrophes add to GDP when we spend money trying to fix or prevent them, if we blindly take growth in GDP as our goal we can grow ourselves right into ecological oblivion.

In contrast, the Genuine Progress Indicator (GPI) was designed as an estimate of net economic benefit. More than two decades of scholarship, research and development stand behind it. Two US states, Maryland and Vermont, have adopted it as a policy tool and several others actively support its compilation and make varying degrees of use of it.

As you’d expect there’s usually a gap between GDP and GPI. Vermont GPI was about 57 per cent of state GDP in 2011. In Missouri, the GPI was just 27 per cent of GDP in 2014. This means that in 2014, every dollar of GDP growth in Missouri brought only 27 cents worth of actual economic benefit. The rest was cost, mostly environmental cost.
 
 

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  • Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.  It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children. Robert Kennedy (1968)
    “GDP does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”
    Robert Kennedy (1968)

    Posted by: A. S. Bhullar | 11 months ago | Reply
  • The term "Growth" itself doesn't explicitly reflect its indication. Growth simply means augmentation. Now augmentation of what? Representing growth of a country has multiple dimensions. It can be growth of economic activities, production, social indicators and so on.

    Reckoning growth in terms of GDP fulfills two purpose.

    1) It helps to analyze the amelioration of total production in comparison to previous year.
    2) It reflects country's position globally.

    If GDP is used to compare economic vibrancy of countries then it is numerically sufficient enough to fulfil this objective. However, if it is used to analyze the progress with respect to previous years then GDP has not included some crucial factors. All it tells is a number which fail to represent a clearer picture of socio-economic development of the country.

    Posted by: Aniruddh Shrivastava | 11 months ago | Reply
  • We all know that the trickledown effect theory of economics highlights that economic benefits reach from rich to poor vertically as we all are linked together. We can’t fully disallow this argument as it works at least to some degree. In this debate my argument is if any indicator like this works partially we can't ignore the statement/ indicator and this doesn’t mean we can generalize the issue. Rather at the same time we must have to find other indicators equally or less important which has the potential to explain the same. Therefore, this debate whether GDP is a good measure of growth or not is also fall in the same line. In this connection I'd also like to mention that a good indicator has the strength to explain the issue to some degree/extent and cannot fully explain the way as we want to see. In this regard my opinion regarding GDP is though it can play a role of a good indicator but cannot frame growth of an economy which is dependent on different multidimensional issues/ factors at different levels. It is true that at present time indices like Genuine Progress Indicator (GPI) or others alike may explain growth with more precision but we can’t take those indices taken for granted as well as this relation is dynamic in nature (as because the economy is changing).

    Posted by: Purnabha Dasgupta | 11 months ago | Reply
  • The term 'Growth' is misconstrued for the longest time, even now, when we know it is at the cost of something. If we say "sustainable growth' i think we can safely include all relevant socio-environmental-economic aspects to measure the progress of a nation. Again, we need better yardsticks for quantifying factors such as wellness index etc. accounting all facets of human development. India should bravely embrace overall development rather than rapid 'urbanisation'.

    Posted by: Aishvarya V | 11 months ago | Reply
  • Words like GDP are indeed provide a helping hand to rich to become richer and poor to become poorer. With this way wealth is concentrated in few hands that is practically has no use in national building. More than 56% of the global wealth is in the hands of 64 people. When you take [0.0 + 100.0]/2 you get 50.0. This is GDP. We are introducing system that make poor to spend more than 50% on issues that have little to do with the development of his family. The government must look at a factor that truely reflect the development per-se.

    Dr. S. Jeevananda Reddy

    Posted by: Dr. S. Jeevananda Reddy | 11 months ago | Reply
  • Radstock, and I am sure you have any other information you 6, but have to be able the, which was a great time in the morning of my friends and neighbours and I will send 88, I will send you a call from a friend who was the first time in total of the most important part time work and I will send the link between you are here to view this email address for the delay

    Posted by: Ram Prakash Rajput | 11 months ago | Reply
  • Being a technical background student in Engineering, I may not be able to judge the above line in a perfect economics terminology as people do ......
    But with a common sense applying on to the above dialogue i can ...."GDP IS NOT A MEASURE OF GROWTH".........
    Reasons-
    1. By increase in production GDP of country can touch sky .. but the people of country may still be at DOWN IN EARTH....
    2. GDP is directly proportional to production ... and this production can be achieved by some new improvement in technology, like Automatisation, yet the development in people lives cant be found....
    to find improvement in people live's employment has to be created rather than production ...

    my take on this is "EMPLOYMENT is ultimate than any other scale to measure development "
    it can be even scaled by " LIFE EXPECTANCY " or STANDARD OF PEOPLE OF COUNTRY(in their day to day life)
    but not GDP

    GOVT. show GDP GROWTH as their development... but showing real development lies in creating EMPLOYMENT [cause its the base for everything]...once a person is employed he can OFFERED TO BUY THINGS , once he start BUYING THINGS he can increase DEMAND in market & once DEMAND increase automatically it has to be MORE PRODUCTION and ultimately leads to GOVERNMENTS FAVOURITE TERM -" GDP GROWTH "



    (ps its my small view, not offend any one )

    THANK you

    Posted by: Uthej Simha | 11 months ago | Reply
  • Gross development product is economic measure of commodities which is countable.It evaluates manufacturing products,final goods and transaction in economy . However it is not comprehensive , like it not evaluates domestic chores done by mother.Work in unorganised sector and voluntary sector not counted.GDP becomes monster when due to ill ecological construction area or country suffer most in health and disaster in longer terms.It do not count happiness or satisfication of a person or count how well a person is mentally.As a person from Uttarakhand , I believe that role of ecology and human behaviour should be count in GDP estimation. Sole rupees flow based criteria is business not economics.

    Posted by: Gaurav Negi | 11 months ago | Reply
    • you say- Gross development product is economic measure of commodities which is countable. water used in the production of those commodities is often unvalued in its physical form and also in terms of ecological damage! so if we minus the value of these uncountable things from total gdp value at present moment! imagine what can happen? have a good day gaurav.

      Posted by: Gaurav | 11 months ago | Reply
  • The definition of GDP itself defines as a quantitative measure of a country's economy so it must be clear then and there itself that it is a tool for measuring the economic growth of a country rather than social and environmental growth. GDP is used by politicians, administrators, business magnets and neo liberal organizations like IMF and world bank to name a few, as a tool to attract investors and rate a country based on its performance and potentials. Though GDP cannot be directly linked to the welfare and wellness of a country's population as the above discussions suggested, buit it surely has a role to play in it. It is GDP of a which defines both the short and long term socioeconomic activities of a country. Be it social welfare, creating infrastructure, health care benefits, food security or employment, GDP is behind everything. A country cannot just go on with high objectives without evaluating its pocket. But this incessant run for the GDP has its own adversities. Countries compete among themselves ruthlessly exploiting its natural resources and neglecting the humane condition of work environment. Cities and even far flung rural areas are succumbing to environmental degradation, Beijing and Dehli being its best example. Dissenting from this incessant and crazy race one small hilly nation came with the idea that is now changing the scene. GNH, Gross National Happiness is being widely accepted and lauded measure of a countries happiness. Born, Nurtured and Cherished in Bhutan, a country whose GDP is even lower than the total fortune of Mukesh Ambani, GNH is now a much sought after goal in the developed nations, especially who rank high in HDI. The WB is also contemplating on releasing the GNH index. Coming back to whether GDP is an accurate measure of "Growth " then i would suggest YES as growth is a narrow term which means to excel by any means but had the question been that is it an accurate measure of development then its surely a NO as development is a much broader term than just economic growth. Its about sustainability, about inclusion, about being HAPPY.

    Posted by: Debojit DAs | 11 months ago | Reply
  • Measuring growth in GDP terms is not an acurate indicator-

    1-it does not take non-monetised activities like cooking,raising children etc.
    2-it does not incorporate environmental damage in pursuit of economic growth.
    3-it also not account inequalities,which is measure concern in developing countrie like India.
    4-it does not provide any roadmap for sustainable development,neither indicate whether growth is coming from sustainable methods or unsustainable methods.

    Posted by: Vineet Katiyar | 11 months ago | Reply
  • i dont know what GDP is ? but after seeing some posts in social media. I came to aware that gov of India is showing us the wrong GDP rate every year by neglecting or ignoring imp issues to be added.

    Posted by: ANANTHARAMAN NAGARAJAN | 11 months ago | Reply
  • So far i thought GDP and Growth of the nation somewhat interrelated. But i am in confusion how they are measure as a growth. Most of the the students getting job in low salary after completion of their studies. farmers situation are very critical. In my question is growth of the nation how they are determined without considering theirs situation. GDP is not a growth of our nation.

    Posted by: Sugumar | 11 months ago | Reply
  • i think GDP is not a true and accurate measurement of growth? because
    it represent only statistic and the condition of government administration is like
    they take survey of that place where there jeep can go so the survey was incorrect first
    second statics do not show reality .

    Posted by: Piyush Mohapatra | 11 months ago | Reply
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