Julian Jessop is an independent UK economist and former Chief Economist at the Institute of Economic Affairs, London
The concept of ‘GDP' has long been criticised as an obsolete standard for measuring a country’s economic success. So, is it time that the European Union move beyond this metric? If so, what alternatives are there?
GDP, or Gross Domestic Product, measures the monetary value of goods and services produced in a country over a given time period – usually a year. Give or take a few differences, it is also equivalent to the aggregate income of people living in that country, and to the amount of money they spend there. GDP is therefore the single best measure of overall economic activity.
Inevitably, however, it has its limitations. For a start, GDP has traditionally only counted activity that is priced and sold, and officially recorded. This excludes most forms of volunteering and unpaid work, which might include running a home and caring for relatives (activities which are still mostly undertaken by women). But by allocating a monetary value to these activities, based on what it might cost to pay someone else to do them, it should be possible to correct for this oversight.
The case for reflecting all unpaid work in GDP is also not as clear-cut as it might appear. For example, most parents (though perhaps not all) would willingly look after their own children for nothing, based on the joy that parents typically derive from childcare. Moreover, any hypothetical value attributed to unpaid work does not equate to real money that could be spent on other goods or services, nor does it form part of the tax base. Including unpaid work in GDP would, therefore, overstate the resources available for other purposes.
[New] approaches work with or alongside conventional GDP, rather than seek to replace it
National statisticians are trying to capture more of the ‘black economy’, but this is not necessarily straightforward either. It would be misleading to include clandestine activities in GDP, given that they are, by definition, not part of the tax base (at least not yet). Furthermore, some of these activities, such as drug dealing, are not usually considered as making a positive contribution to well-being, which is why they are illegal in the first place.
Another potentially even more serious criticism of GDP is that it only measures the value of output. It does not usually take account of the resources that have been used to produce this output, or any negative ‘externalities’ for that matter, such as the carbon emissions that contribute to climate change. For example, a country might be able to boost its GDP by cutting down all of its forests and selling the wood. The boost in GDP would only be temporary – and it would come at a huge cost to the environment.
But statisticians and economists are increasingly aware of these issues, too. Many countries are already developing methodologies based around concepts such as ‘natural capital’ (Professor Dieter Helm is a leader in this field in the United Kingdom). The emphasis here is usually on placing a market value on the non-renewable assets used as an input to economic growth, and by putting a price on externalities (for example via carbon taxes) to make sure that the polluter pays. In other words, these approaches work with or alongside conventional GDP, rather than seek to replace it.
Finally, there are concerns that a GDP measure which focuses on the number and value of transactions might fail to take enough account of improvements in the quality of goods and services, in addition to savings in time. This is particularly important as economies are increasingly dominated by services and new technologies, where output is intrinsically harder to measure. Above all, changes in GDP may not answer the fundamental question of whether people are any happier.
GDP is not the only way to measure the success of an economy, but it is generally the most useful
Fortunately, many experts are working hard on this as well. For example, the UK economist Diane Coyle has explained how governments could make more use of survey evidence on well-being and the relative value of increased leisure time.
Indeed, most countries (and Eurostat) now publish a wide range of more subjective indicators, including, at least in the case of the UK, life satisfaction, happiness and anxiety levels. This is on top of a huge amount of more conventional data, such as hours worked, levels of debt, income inequality and absolute poverty, all of which may also be relevant.
In summary, GDP is not the only way to measure the success of an economy, but it is generally the most useful, especially for analysing comparisons over time and with other countries. Unless you have a magic money tree, it is also the best guide regarding the capacity to finance debt or to raise taxes to pay for public services. What’s more, statisticians and economists are continually working to improve how GDP is measured.
Of course, we also need to pay attention to a wider range of economic and social indicators. In reality though, governments are already doing this. When was the last time you heard a policy being promoted purely on the basis that it would boost GDP by x%, rather than in terms of some loftier ambition to make our lives better?
IMAGE CREDITS: Aleksandr Berdnikov/Wikimedia Commons