GDP - Gross Domestic Product Used To Be Based On Manufacturing

The subjectivity of statistics

What a week – the head of the Scottish National Party pushed for another Scottish referendum (indyref2), the Netherlands reelected Mark Rutte as PM, and Trump continued to hold the world’s media enthralled as he released his health care bill, his tax returns were leaked and he accused everyone of spying on him. In the last few hours, it was announced that the previous Chancellor of the Exchequer, George Osbourne, has been appointed Editor of London’s biggest newspaper.

There is a lot of outrage these days – so the ECC has been quietly plugging away talking about some larger news items that may be left out of your news feed, or focussing on expansive topics, like the nature of democracy and the future of work. Today I’d like to focus on GDP.

GDP (Gross Domestic Product) – is often brought out in political arguments to state how well a country is doing economically. For example, some commentators would like to call Brexit a success or a failure dependent on GDP. This happened soon after the vote when the Independent (pro-remain) and the Express (pro-leave) published completely different commentary based on the same data.

However, this is bias in a simple form. The problems with GDP run deeper than this. For despite its apparent objectivity, there are a number of subjective parts to the calculation.

Additionally, some thinkers like Rutger Bregman (whose book ‘Utopia for Realists‘ inspired this newsletter), believe that a focus on buying and selling goods means we only value the things that come under its umbrella. He believes we need a need stat that will help us increase leisure time and help the environment.

What is GDP?

What is GDP?

“GDP, or Gross Domestic Product, is arguably the most important of all economic statistics as it attempts to capture the state of the economy in one number.

Quite simply, if the GDP measure is up on the previous three months, the economy is growing. If it is negative it is contracting.

And two consecutive three-month periods of contraction mean an economy is in recession.”

Read more on the BBC

Problems with GDP

GDP, Ecosystems and the Environment

“As an overall barometer of progress, Gross Domestic Product (GDP) has long been criticised because it simply measures economic activity and not genuine improvements in the quality of our lives …

GDP also tells us nothing about sustainability. It fails to track the depletion or degradation of natural, human, built, and social capital on which all economic activity ultimately depends. It fails as well to capture the inherent unsustainability of economic activity financed by debt.

Finally, GDP fails to recognise the costs of inequality. It counts growth concentrated in the upper-most income brackets as “progress,” even if incomes and quality of life are falling for most.”

Read more in the World Resources Institute

The trouble with GDP

“A bias toward manufacturing is not the only distortion. By convention GDP measures only output that is bought and sold. There are reasons for this, only some of them sound…

This convention means that so-called “home production”, such as housework or caring for an elderly relative, is excluded from GDP, even though such unpaid services have considerable value. In early editions of his bestselling economics textbook Paul Samuelson joked that GDP falls when a man marries his maid.”

Read more in the Economist

Rewriting history : the nation’s income is a constantly moving target

“By how much did Britain’s economy grow in 1959? It would seem to be a question that ought to have been settled long ago. It hasn’t been. Samuel Williamson of the University of Illinois finds that in the British government’s annual “Blue Book” reports on GDP in the half-century or so since this uncelebrated year, there have been 18 different answers. The Blue Book published in 1960 said 2.7%; that of 2012 said 4.7%. British GDP, it seems, is under almost constant revision.

In poor countries, revisions can be huge. Nigeria’s GDP was revised up by 89% in 2014. Later that year, Kenya’s GDP was revised up by 25%. Ghana’s GDP had been upgraded by 60% in 2010.”

Read more in the Economist

The war time metric

One of the great inventions of the 20th Century

“Early in 1942, annual estimates of gross national product were introduced to complement the estimates of national income and to facilitate war time planning. Wartime planning needs also helped to stimulate the development of input-output accounts. Nobel laureate Wassily Leontief developed the U.S. input-output accounts that subsequently became an integral part of the [national income and product accounts] NIPA’s. In commenting on the usefulness of the national accounts, Wesley C. Mitchell, Director, National Bureau of Economic Research, said: “Only those who had a personal share in the economic mobilization for World War I could realize in how many ways and how much estimates of national income covering 20 years and classified in several ways facilitated the World War II effort.”

Read more in the Bureau of Economic Analysis

In conclusion…

You might have heard these arguments before, as GDP and its variants have been criticised many times since it was devised in the 30s.

Some state that despite its subjectivity, it is still a useful measurement of the state of the country. If you have a high GDP then generally you also have high life expectancy etc.

Nevertheless, what you measure tends to be what you improve – so perhaps we should have a wider conversation about what we think is important in society today.

If you like this newsletter you may also like a newsletter we wrote about globalisation and inflation last year.

Alice Thwaite

Alice Thwaite is Founder and Editor-in-Chief of The Echo Chamber Club. Her twitter is @alicelthwaite. She reads as many independent blogs as she can find, and uses social media monitoring to identify common opinions that liberal metropolitans hold, or where they need a little extra information.