Can we really trust GDP to tell us the truth about a nation’s health?

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by Correspondent

 

 

A monetary sign or indicator is a bit of economic data, usually of macroeconomic scale, that is used by investors to interpret current or future investment possibilities and judge the overall health of an economy.

Economic indicators can potentially be anything the investor chooses, but specific pieces of data released by government and non-profit organizations have become widely followed – these include: The Consumer Price Index (CPI), Gross Domestic Product (GDP), Unemployment figures and the price of crude oil.

We will examine the usefulness of GDP which is used by many countries.

 

 

Gross Domestic Product is one of the most important numbers in economics. But can this number be trusted to provide a transparent and accurate measure of an economy’s well being and its true growth?

Consider this—GDP measures income, but not equality, it measures growth within sectors, but not destruction or moral growth of a nation. It even ignores values like social cohesion and the environment.

Yet, governments, businesses and our most respected economists swear by it.

 

 

But for many reasons, GDP does not adequately reflect the true health of a nation. Many revered economical minds agree with this line of argument and opine that it really needs to be replaced by more comprehensive measures.

GDP essentially measures the nation’s economic performance. It is determined by the market value of all final goods and services and has been used since the 1930s.

Using GDP has its benefits which cannot be negated. In fact, using this measure exclusively has placed complex and even blooming economies such as the United States of America (USA) at or near the top of the financial food chain for decades.

 

 

Even with this mind, several economists who are deemed to be the “practical realists” of our time have urged that measures such as GDP are far too narrow to gauge the overall health of a nation and its people. And that presents a problem for developing countries like Guyana.

Furthermore, economic growth, especially for developing countries is something that is desperately sought after. It refers to a state which can be maintained without creating other significant economic problems, especially for future generations.

But it is something that occurs when real output increases over time.

 

 

Periods of growth are often triggered by increases in aggregate demand, such as a rise in consumer spending. But sustained growth which is perhaps one of the goals most nations struggle to achieve, involves an increase in output. If output does not increase, any extra demand will push up the price level.

According to François Lequiller, head of national accounts at the The Organisation for Economic Co-operation and Development (OECD), he believes that part of the problem is that perhaps the economist and even the layman expects too much from GDP.

He explains that seeks to know about economic growth as it relates to the expansion of output of goods and services, then GDP or preferably real GDP – which measures growth without the effects of inflation – is perfectly satisfactory. It has been built for this purpose.

 

 

But he too stresses that by definition, hardly any statistics available on the underground economy. The underground economy refers to the illegal means by which money infiltrates or makes its way into the monetary systems of a country.

He says that there is a need for a sophisticated system that can add it all together, from the number of new cars and haircuts, to the volume of teaching, etc.

In GDP, each component is given the weight of its relative price. In market economies, this works because prices reflect both the marginal cost for the producer and the marginal utility for the consumer: people sell at a price that other people are willing to pay. But the contribution to welfare of the output of government services, in particular public education and health, which by definition have no market prices, is difficult to measure, despite their importance in our economies.

 

 

Lequiller says that one could perhaps recommend users to look at alternative measures to GDP that exist inside the national accounts, such as Net Domestic Product or National Income. He said that these may be more suitable for measuring particular contexts.

Regardless of the economic fortunes that GDP can tell us, it is established that it is unable to captures at least the wellbeing that results from the production of goods and services. It is also true that there are other dimensions to wellbeing which GDP misses.

Nevertheless, there are moves globally to strengthen GDP as an indicator. Statisticians at the OECD and around the world are currently discussing new reforms to the current system of national accounts.

 

 

One such reform now under consideration is how to recognize spending on research and development as investment, since at present, in business as in national accounting, these expenditures are seen as being consumed immediately, and so do not contribute to market GDP or to the stock of assets.

If the reform goes ahead, their true contribution over time would be counted, which is intellectually more satisfying.

While this would be a significant reform, it still depends on getting good quality data. Without them, the beacon of GDP would become dimmer, and we certainly do not want that to happen.

 

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