GDP As an Economic Indicator

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Bill Brooks || CC

In the realm of macroeconomics, GDP is the most prolific economic indicator. Every time you turn on the national news channel there is always a segment where they talk about the economy, and every time experts base their position on GDP. Despite its popularity, there are some serious holes that GDP and its counterparts (Real GDP and GDP per capita) do not show. It fails to measure income equality, human costs (time worked), unemployment, externalities of production (destruction or depletion of environment), market transactions, efficiency, sustainability, quality of life, or welfare. And it only accounts for specified production (and does not include illicit production or non-market activities). It does not account for everything and yet, politicians, news hosts, businesses, and average people use it as if it’s the be-all-end-all indicator of how the economy is doing. Is there a better option?

There are multiple different statistics that are used to measure these areas. Unemployment rates are another very common economic indicator but they can be just as misleading as GDP. They only measure the percentage of unemployed people who have recently sought out work, do not consider long-term unemployment, and count both part-time and full-time employees as fully employed. Incomes compared to the cost of living and inflation do not account for the cost of time worked or number of jobs held to achieve that income.

And what about quality of life? This is hard to measure but the previous two indicators do help in an economic sense. During the first two years of austerity measures imposed on Greece after the Eurozone Crisis, Greece saw a 35% spike in suicides. Depression rates in Greece also saw an increase from approximately 3% to 8% from 2008 to 2011 respectively. While everyone was concerned with how GDP was recovering, they rarely touched upon how the people of Greece were holding up.

Can we alter GDP to fill some of the gaps that it doesn’t cover? Well, there are reasons why we use different indicators to measure various aspects of the economy. To find GDP, one must already make certain assumptions and imputations on the production that are going to be calculated. Therefore, things like illicit production are not included in the calculation. To many imputations, the reliability and strength of the indicator is weakened (i.e. higher likelihood of errors). There are continuing discussions to reform GDP in a reasonable manner without compromising its integrity — such as how to recognize spending on research and development.

So, GDP is here to stay. With slight changes to calculation of GDP it can be improved, but it will never account for everything. The question now is, should it be relied upon as heavily as it is or is there better indicator that should be used more commonly?

The United Nations Human Development Index (UNHDI) is a popular choice as an alternative. The index measures the impact of growth on people (health, education, and income) rather than the economy under the assumption that economic growth/development of a country does not equate to human development/well-being. The HDI adjusts GDP per capita to reflect Purchasing Power Parity (the comparison of purchasing power between countries via currency differences). Furthermore, the Inequality-adjusted Human Development Index (IHDI) accounts for inequality as well. Greece did see a small drop on the HDI between the years of 2008 and 2013 but still ranked high due to strong health and safety regulations of the EU.

Another alternative, the Genuine Progress Indicator (GPI) measures progress by people’s quality of life rather than by economic growth. The GPI assigns value to the life-sustaining functions of households, communities and the natural environment so that the destruction of these, and their replacement with commoditized substitutes, no longer appear as growth and gain. However, it is primarily used for environmental and ecological economics.

Gross domestic product is undoubtedly a useful indicator of how the economy is performing. It shows one aspect of the economy that can be used to interpret a general level of “health.” However, while GDP is comparable to a simple doctor’s check-up, it isn’t as in-depth as a yearly physical. It is a simple statistic that can be used to gauge the health of the economy in broad terms.

That is why people use it and have come to rely on it so much. Where people start to get mislead is when they only rely on this one indicator as the main measurement for how the economy is performing. The UNHDI and GPI are a bit more involved and cover more specific areas. After all, people typically don’t want the doctor to give a thorough breakdown of our health, we just want to know if everything is alright. However, it is a doctor’s job to go in-depth and talk about what might be a problem, what can be done to fix it, or what can be improved whether you care to hear it or not. Solely relying on GDP does not give the public a truly accurate representation of the economy with regards to social well-being, sustainability, and the environment.

Sources:

http://www.consultmcgregor.com/documents/resources/GDP_and_GPI.pdf

http://hdr.undp.org/en/content/human-development-index-hdi

http://hdr.undp.org/en/data

http://rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

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