Limitations of GDP

Ross Gittins has a piece in The Age on obesity.

As measured by gross domestic product, obesity is a win-win-win situation. The more you eat the more you add to GDP and the profits of businesses. If the messages of advertising and marketing make you self-conscious about your overweight, everything you spend on fancy diets, gym subscriptions etc adds to GDP.

And then when you damage your health, everything you, the government and your health fund spend on trying to keep you going adds to GDP. Even when you die prematurely that won’t count as a negative against GDP, although the absence of your continued consumption will be missed.

Gittins is trying to make the point that GDP is a faulty measure of progress. I agree – GDP is not meant to measure progress and well-being and happiness and all the good things that people would like to see measured. True it can serve as a proxy for all those things, but it is a very inaccuarate proxy.

GDP is an accounting measure of production and should be seen as such. As with all measurements it suffers from various defects; government spending goes in at cost, potato chips are valued equally with computer chips, and so on. High levels of aggregation mask important variations across the economy. Nonetheless, it is an important consideration when evaluating policy outcomes. As Lord Kelvin suggested without measurement our knowledge is meagre and unsatisfactory, but that doesn’t mean that with measurement that our knowledge is complete. In many instance GDP as a measure works well and often works better than competing measures, but nobody should under the illusion that it always works as well as we would like.

Update: Julie Novak has a comprehensive discussion here.

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17 Responses to Limitations of GDP

  1. I agree. This point is one of the most irritating intellectual tics of the soft left. They invent a straw man and then knock it down.

    Ironically for social democrats in power it is the most important economic-social indicator: it measures their capacity to tax and spend, it correlates with numerous other indicators that interest them, and at least in the short term it is easier to manipulate than most other indicators.

  2. What’s a better measure of economic progress, that can be used internationally as GDP is used now?

    I’ve heard these arguments about the flaws in GDP before. They make sense, but nobody seems to have an alternative.

  3. jtfsoon

    What’s a better measure of economic progress, that can be used internationally as GDP is used now?

    There really is none. Aggregate measures are necessarily crude but there really is nothing better than GDP.

    For an alternative view, ask Graeme Bird.

  4. JC

    I agree David. There’s very little to use other than this measure.

    In the old days they would use industrial production, however with the advent of the service industry that is left wanting.

  5. JC

    I think Bird thinks gross domestic revenue is a better measure. It’s a huge freaking number.

    Although I must say that wall street looks at this number for pointers to where the economy is heading as it sometimes leads GDP directionally.

    But of course Bird has little understanding of economics so he wouldn’t know.

  6. .

    Sure GDP is flawed. There are no better alternatives. The GDR measurement Bird talks about is really another way of expressing capital intensity or GDP per capita.

    Real GDP per capita. Nothing is better. Attempts to replace it are lame.

    They also carry an agenda we know Gittens, the unqualified journalistic fraud tries to Shanghai onto us.

    He beleives he has enough money and likes his positional good. He doesn’t want you to have more. So he supports low growth and GDP destroying policy and invents a metric to back his cause.

    When the left lost the debate that free markets could/couldn’t provide more growth, they began to attack prosperity itself.

  7. TN

    The Commonwealth Treasury pointed out the limits of GDP as a measure of welfare 40 years ago. The National Competition Council did a nice piece on this again in its 97-98 Annual Report*. Yet Gittins thinks this is somehow news!

    Nevertheless, the discussion in this comments thread assumes that we need an aggregate “measure of progress”. In fact, “progress” or “regress” is the result of a billion decisions. If those decisions are made against a backdrop of policy made against sound principles – such as identifying and correcting market failures while minimising side-effects – then we can expect progress to tend towards its maximimuim attainable value, whether that is measured in some aggregate sense or not.

  8. Mother Hubbard's Dog

    Bastiat, 1850. Broken window = opportunity cost. Gittins must have been desperate for something to write.

  9. JC

    Gittins is a valued economics journalist at Fairfax. Greens supporters love him because he explains economics to them and then they understand.

    I hope he keeps going for decades more.

  10. TN

    Unfortunately though, Gittins keeps getting it wrong and misrepresenting how economics is actually practiced.

  11. JC

    TN

    In a perverse way, if gittins is 100% wrong, you could almost suggest he’s right..

    In other words if you read the nonsense he scrawls and always assume he’s wrong then the opposite of what he says must by definition be right. So in fact he should be read and that way determine the proper course.

  12. Sleetmute

    I think dot hits the nail on the head – the left have given up attacking capitalism as the best means of achieving prosperity and thus have decided to attack prosperity itself by discrediting GDP and creating idiosyncratic new measures that suit their agenda.
    But if we are having a go at GDP, its biggest failure in overstating prosperity is not small fry (pun unintended)like potato chips and car accidents, but the inclusion of government services at cost. While the salaries of frontline health workers may understate their value to society, the opposite is almost certainly true for the salaries of most other government workers. All those state and federal bureaucrats effectively involved in rent-seeking (ie the highly-paid public servants working in the CBDs of our state and national capitals) and those public servants managing the allocation of transfer payments (eg Medicare, family benefits, Newstart, various pensions, etc) do not add value equivalent to the salaries they earn. Redistribution itself may be regarded by some as socially desirable and enhance some measure of human progress, but one cannot argue that the machinery involved in that redistribution adds value.

    If all these amounts were deducted from GDP, they would show that much of the growth in our measured prosperity in recent decades reflects an increase in fairly useless paper shuffling. It would also highlight some of the costs of the ongoing expansion of the role of government.

  13. entropy

    I don’t know sleet, I am one of those highly paid CBD public servants, and I believe the community gets value for money. We can all point to time servers in the public sector or any large bureaucracy really, I guess it is incumbent to root them out, rather than label all with the same brush.

  14. Sleetmute

    I’m not saying you are lazy. You may be very good at your job and positively contribute to the development or implementation of policy, but do you actually create value? Most new policy, particularly at the state level, is average to bad for society as a whole.

  15. asf

    A lot of public servants work really hard. The problem is that it doesn’t matter how hard they work, they still can’t solve the information problem. Therefore you want as few as possible for the function of a free society.

  16. JC

    A lot of public servants work really hard.

    You know what ASF… despite the bullshit I sometimes go on with I actually do believe that. Most are just as dedicated to their jobs as people in the private sector.

    I totally agree with the rest of what you said.

  17. entropy

    Sadly I agree that there is a lot of truth to Sleet’s statement:

    Most new policy, particularly at the state level, is average to bad for society as a whole.

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