Measuring Income or Well-Being?
In the nerd’s menagerie of economic indicators, gross domestic product is a special attraction. By definition, GDP is simply the market value of all goods and services produced in a given period. By convention, it’s often used as a measuring stick for a country’s well-being. GDP can move markets, affect elections, shape monetary policy and sway business decisions. It has its critics. Some think it doesn’t measure enough, measures too much or measures the wrong things. Some think a single-minded focus on GDP has warped markets and public policy. Others think it does what it does just fine.
GDP numbers influence economic and political debates worldwide. The World Economic Forum in mid-January unveiled a GDP alternative that focuses less on output and more on living standards, including quality of education, level of entrepreneurship and access to health care and banking services. In the U.S., investors have anxiously watched GDP reports for hints about when the Federal Reserve might raise interest rates. In China, the government’s preoccupation with its GDP targets may be spurring factories to produce unneeded goods and causing bureaucrats to hide or falsify data. This has sent investors hunting for other measures of Chinese economic performance, like steel production and car sales. India changed its method of calculating GDP in 2015, but this left economists bewildered since it showed the economy growing much faster than typical indicators like industrial production.
The English economist William Petty made the first systematic attempt at calculating national income and expenditures using double-entry accounting in 1665. Subsequent theorists from Adam Smith to John Maynard Keynes offered variations. Its modern incarnation dates to the Great Depression, when U.S. presidents struggled to understand how the economy was faring based on inexact measurements, such as railroad shipments and the stock market. The economist Simon Kuznets devised a system of national income accounts that was presented to the U.S. Congress in 1937. The first estimate of what was then called gross national product followed in 1942. Most countries now tally GDP using data for consumption, government spending, investment and net exports, governed by United Nations guidelines. In the U.S., the Bureau of Economic Analysis synthesizes about 10,000 data streams to produce its quarterly estimate, usually expressed as a rate of growth and always subject to revision.
Critics tend to agree with Robert F. Kennedy’s memorable line in a 1968 presidential campaign speech that GDP measures everything “except that which makes life worthwhile.” It doesn’t directly assess health, happiness, leisure or equality. In fairness, it was never meant to. Kuznets himself warned that it wouldn’t be a great indicator of social progress: A dollar spent building a prison counts the same as a dollar spent building a school. This has led to proposals for alternative measures with names like the Genuine Progress Indicator and Gross National Happiness. Others argue that the single-minded pursuit of GDP growth has led politicians to ignore environmental degradation, encourage financial risk and tolerate widening income inequality. GDP also arguably has technical shortcomings: It doesn’t accurately track nonmarket transactions, intangible goods or the informal economy, and while natural resources don’t count toward GDP, depleting them does. Much of the digital economy — Google, Facebook, open-source software — is free to use and thus barely shows up in GDP. And the slow pace at which GDP data is compiled is becoming a bigger liability in measuring a fast-changing economy. Many economists would still agree with Paul Samuelson and William Nordhaus — authors of a famous textbook on the topic — who ranked GDP “among the great inventions of the 20th century.” Whether it’s suitable to the 21st is perhaps a harder question.
The Reference Shelf
- The U.S. Bureau of Economic Analysis published a useful primer on national accounts.
- The think tank Demos argued that over-reliance on GDP has led to some deeply misguided public policy.
- The U.S. Commerce Department offers an interesting history.
- A commentary in Nature advocated finding a successor for GDP.
- A panel of eminent economists proposed alternative ways to measure economic and social progress in a 2009 report.
- A Bloomberg QuickTake explains productivity, a close relative to GDP with its own measurement problems.
First published Nov. 11, 2014
To contact the writer of this QuickTake:
Timothy Lavin in Hong Kong at firstname.lastname@example.org
To contact the editor responsible for this QuickTake:
Anne Cronin at email@example.com