Economics

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Issue Overview: GDP

TOP: Map of U.S. states by GDP per capita in U.S. dollars (2012 figures). Courtesy of Wikimedia Commons. BOTTOM: Graphics courtesy of Bloomberg.

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.

The Situation

GDP numbers influence economic and political debates worldwide. In the U.S., investors are

anxiously watching GDP reports for hints about when the Federal Reserve might raise interest

rates. In China, the government's preoccupation with GDP may be fueling financial and social

instability. In Japan, shrinking GDP has been part of the prime minister's case for economic shock

therapy. Politicians tout GDP when things are going well and enlist it when they're not.

Economists often express other data — such as debt and government spending — as a percentage

By Timothy Lavin, Bloomberg on 09.21.16 Word Count 617 Level MAX

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of GDP and budget analysts take it into account when

making projections. Questions about the reliability of

China's GDP reporting have sent investors looking for

other measures of economic performance, like steel

production and car sales. India's novel method of

calculating growth has left economists bewildered.

The

Background

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 estimate, usually

expressed as a rate of growth and always subject to revision.

The Argument

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

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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.