Revisiting Gross Domestic Product
Gross domestic product (GDP) has long been considered the premiere macroeconomic indicator. As a measure of domestic productivity, it is uniquely adept at pointing towards economic growth and wellbeing. It is also intertwined with other important employment factors; output, unemployment, interest rates and, inflation. Hence it’s no wonder that since its inception, credited to Russian American economist Simon Kuznets in 1934, it’s been widely used in economic theory, analysis and forecasting across the globe.
In the 21st century, GDP continues to play an important role in everyday financial reports, news bulletins and morning television. It directs public opinion or at times public angst. However, being entrenched in economic and financial literature, it is easy to forget what we’re actually measuring when it comes to GDP, and whether or not it truly reflects what we ‘value’ in our developed society.
At face level, GDP is very simple. It refers to ‘the value of goods and services that are produced in an economy over a particular time period’ or more technically ‘the market value of final goods and services’. Consequently, as an economic indicator, it is very powerful in consolidating the productive effort of a national economy into a single figure. So we have a lot of reasons to herald our productive effort; it leads to higher income, more consumption and investment to generate further economic growth and also maintains a strong correlation to a high standard of living. However in only operating in the ‘market’ economy, GDP fails to encompass a variety of factors that we highly value in civilized society. Aside from the underlying measurement issues including disregard for the cash and underground economy, and non-market activity including volunteer, charitable and peer-to-peer work, GDP completely fails to take into account environmental damage, quality of life and economic inequality. It might be easy to argue that these factors are not easily quantifiable and even more difficult to factor into economic production. And yet over the last 80 years, these factors have grown to great prominence amongst civilized nations.
Environmental damage has become a household topic, swinging federal elections and garnering public attention. The carbon tax pre-empted the fall of the Labor Government and is currently infamously renowned as the only promise the Liberal government may keep over the next 2 years. Aside from our own domestic controversy, we face an increasingly economic international landscape for climate change between carbon taxes and the emissions trading scheme. And yet, GDP falls short. Similarly, inequality and poverty occupy the frontier of economic thought at the moment, challenging us to rethink the health of our nation in the face of inequitable distribution and increasing disparity. And yet again, GDP falls short.
How have we become so inherently dependent on a measurement tool that is increasingly failing to meet expectations of what really matters in society today?
Disregarding GDP is obviously not the answer. In the face of its shortcomings, it remains a useful economic tool to help us understand and analyse our economy and many of its intricate relationships. But it is time to rethink the prominence we give it as the ‘be all and end all’ of our economic wellbeing. It’s important that we as a nation continue to remember that there is a bigger picture to our economy and society than the quantifiable and unquantifiable measurements we abide by.
Speaking two days after announcing his presidential candidacy, Senator Bob Kennedy best demonstrates this fine line in an excerpt from his speech to the University of Kansas:
“Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising…It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs, which glorify violence in order to sell toys to our children. Yet the gross national product… does not include the beauty of our poetry…the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”