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What the Measure of Economic Performance Misses About Economic Performance
DIANE COYLE is a freelance economist and a former advisor to the UK Treasury. She is author, most recently, of GDP: A Brief but Affectionate History, from which this essay is excerpted. Copyright © 2014 by Diane Coyle. Published by Princeton University Press. Reprinted by permission.See more by this author
The media and economic communities regularly use Gross Domestic Product (GDP), a tally of all goods and services produced within a country during a specific time period, as a measure of economic performance. But GDP is a relatively new way of assessing economies. In fact, the concept wasn’t invented until the early twentieth century, when the Great Depression and then World War II pushed Washington to start counting government spending on services and war (before seen as a necessary evil that reduced national income) as a net positive for the economy.
The construction of GDP statistics was not straightforward, even in those early days when the economy was less complex than it is now. It took decades for more than a handful of countries to create national accounts and for economists and statisticians to create methods for comparing GDP over time and across nations. And the work continues to this day. One illustration is adjusting the dollar total for inflation to get “real” GDP. But constant improvements in the quality of products, and the introduction of new goods and services over time, have made it harder than ever to calculate price changes. For example, a 2013 laptop was a vastly different machine from a 2004 laptop, even if their price tags were roughly the same. A few decades ago, meanwhile, the price of computing was infinite, because computers did not exist. It is hard to capture this transformation in a single price index.
Further, despite years of progress, it is still difficult to make international comparisons, given the significant differences in economic structures around the world and in what consumers spend their incomes on. Although economists don’t hesitate to make generalizations, our impressions of growth in different economies at different times depend on the statistical methods. For example, introducing those adjustments for improvements in the quality of computers in the 1990s made U.S. economic growth look much stronger relative to other countries.
There are other things that GDP misses entirely. It has nothing to say about the environmental damage that the production of goods and services causes. And, although GDP growth is taken as a proxy for progress, it was never intended to measure happiness or welfare. Finally, as nations struggle out of the global downturn of 2007-2008, some seriously question whether the model overestimates the contributions to the economy of financial services.