Can Economists Put a Value on a Good Night's Rest?by and
Technological change, new research challenging old methods
No single best way of measuring trends in living standards
For an example of the problems with the standard measure of economic growth, look at beds. Or media.
Beds account for a tiny share of gross domestic product even though sleep is tremendously useful to consumers, according to an academic paper presented at a conference this week in Dresden, Germany. The authors made the point to illustrate their research into free online media and its impact, or lack of it, on official GDP figures.
The wide-ranging conference hosted by the German statistics office shines a spotlight on some of the weaknesses in the century-old measure of economic well-being, arguably bolstering the case for a hunt for better methods. Another paper looks at divergences between GDP per head and median household income -- one way of gauging inequality -- and concludes there is currently no clear choice for assessing trends in living standards.
Take Facebook or Google. Those and other online services provide hundreds of millions of people with information and entertainment. Yet because they’re free, the contribution to the economy isn’t currently captured in national accounts.
Noting that some economists believe GDP growth is “badly underestimated” by the failure to include free media, Leonard Nakamura of the Federal Reserve Bank of Philadelphia, and Jon Samuels and Rachel Soloveichik of the U.S. Bureau of Economic Analysis tried to work out a number. They imputed production and consumption figures for advertising-supported media by treating the business model as a series of barter transactions -- YouTube videos for ad views.
On the face of it, the results may disappoint critics of GDP. Including free media would have boosted real output in the U.S. between 1998 and 2012 by just 0.009 percent a year. Yet the researchers also made a fundamental point: GDP is not synonymous with usefulness.
“There are many areas of the economy in which consumer spending on an activity is much lower than total utility for that same activity,” they said. “For example, sleeping occupies about one-third of total time and provides enormous utility. Yet beds represent a very small fraction of consumer spending.”
Another paper presented at the conference, by the Institute for New Economic Thinking’s Brian Nolan, Max Roser and Stefan Thewissen, looks at GDP per capita. The measure has outpaced median household income in recent decades in many developed nations, particularly in the U.S. The authors say that has prompted calls for the income of a “typical” household to receive more focus in assessing trends in economic well-being.
After analyzing data from 27 countries, they found that in fact shrinking household size often contributed more to the divergence than income inequality. They ultimately concluded that there is currently no single best method to assess a country’s prosperity. Only a careful case-by-case examination of individual indicators in each economy will allow researchers to judge whether efforts to promote real income growth have been a success or failure, they said.
In other words, GDP may have risen from humble beginnings during the Great Depression to become an essential gauge for governments and central banks across the world, but that shouldn’t be the end of the story.