Monday, March 29, 2010

Is it all about GDP and growth?

(Guest post from Christian)

So if you believe the numbers, in the recent downturn, Australia managed to avoid 2 consecutive quarters of negative GDP growth and therefore had no recession.  This is an often proudly quoted fact by various Australian politicians and economists as a sign of the strength and resilience of Australia's economy and its wise management.  But what exactly does it all mean for the people of Australia?

GDP is one of the most often used measures of the wealth of a nation.  Therefore wealth creation can be measured in terms of the growth rate of GDP, in either nominal or real terms. So in this sense, Australia avoided 2 consecutive quarters of diminishing wealth, and (again assuming you believe the numbers) is rolling along nicely with low inflation and a reasonable rate of growing wealth.

However, GDP is just one popular measure of a nation's wealth in dollar terms.  In my opinion, if we are looking to value national wealth then it will necessitate a subjective measure, since each person places their own value on a dollar, a good, or a service.  We also need to take into account the value each person places on social factors such as crime, or environmental factors such as air quality.   Anything that contributes to bringing an emotion – positive or negative - to a person would be valued by that person.  So, all these factors will contribute to national wealth.

When measuring a nations wealth on GDP growth some of these key elements of national wealth are  not captured.  So if a democratically elected government has a duty to maximise the wealth of its people then this definitely will cover factors which are not measured by GDP.

It looks like the French cottoned onto this a while ago, establishing establishing a commission to look at measures of progress with a wider scope.  

In the end it comes down to each individuals expectations and perspective.  And this means it is difficult, if not impossible, to measure a combined group of different people's values on all the above factors and arrive at an accurate aggregate.  Even if we assume that each individual within a country has the same values and use a subjective survey to make an average measure, then we can't even compare the result between 2 or more different countries as the measure is subjective to each country.  You can assume, but it is still just a plain false assumption that everyone has the same values.

So what is an alternative?

Quality of life is measured by the Human Development Index (HDI) published by the United Nations - but again it is using numbers which each person would value differently.  Life expectancy, literacy rate etc etc.  These measures miss what quality is all about.  For example we need to measure NOT how long a person lives (quantity) but how much they actually live or the enjoyment they get from it (quality).  I believe the HDI is a step in the right direction, but I fear that any statistical measure will continue to disregard the unquantifiable factors which really make up quality of life.

Recently, renowned economist Sir Partha Dasgupta put it like this -"As long as we rely on GDP and HDI, we will continue to paint a misleading picture of economic performance.  So successful has this enterprise been that if someone exclaims, 'Economic growth!', no one needs to ask, 'Growth in what?' -- we all know they mean growth in GDP."

At the moment there seems to be an intense focus throughout the world on GDP growth and inflation in macro economic comparisions.  The targets are maximum growth in a low inflation environment.  However I feel, firstly, we can still improve national wealth without necessarily meeting these targets. Secondly, we could actually be destroying national wealth whilst meeting these targets.  Any thoughts?


  1. I know the old saying "what gets measured gets managed", but do we need to measure any of this? Isn't progress itself a malleable concept?

  2. what really happened is that we avoided a recession through our own demise, so to speak.

    Recall the eqn Y = C+I+G+X-M

    During the troubles, C and I didn't fall so sharply due to the government stepping in and throwing money at houses and shoe shops.

    At the same time, M collapsed because firms couldn't afford to invest in inventory or capital expenditure all of a sudden, therefore making the GDP picture look a lot more rosy than it was.

    Anyhow, statistical sniggering aside, it isn't the question of growth that is the problem but rather the question of development. Before determining whether or not people have "grown", it seems like it would be a good idea if we knew in what direction or to what aim, else anything could be classed as growth. This means that we would need to determine some final goal for humanity and opens up the debate of aristotle once again, but there you have it.

  3. Agree with your assesment of how the elements GDP of GDP were maintained there Stephen.

    So I assume you agree that the current fascination with GDP and maximising GDP related growth is not neccesarily in the best interest of the nation? Do you have any ideas about a better way to measure economic progress/development/wealth?

    Agree Cameron, without a better way to measure national wealth, it seems that GDP will continue to be known as "the" ultimate measure.

  4. I am no economist, but I would have thought the change in GDP per capita is a more accurate measure of gauging national wealth. Considering Australia's rapid population growth, in terns of GDP per capita, we probably did experience, and perhaps still are experiencing recession.


  5. Robert, I'd be interested to know why you think GDP even in a per captia measure is a useful indicator? The argument I was trying to present was essentially that a quantitative measure such as GDP ignores indicators of quality even on a per capita basis.