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Is GDP any good?

GDP – or gross domestic product – is not a universally-liked measure. Its critics say it overestimates growth by not taking into account, for example, environmental factors. Kevin Carson complains that it does not deduct “broken window” spending. Trashing a window and then replacing isn’t his idea of real economic growth. Yet I think GDP is a good measure precisely because it keeps things simple. Government statistics are difficult enough to objectively collect as it is: if statisticians have to make value judgments about how much a natural habitat or a certain type of bird flying in the sky is worth, the statistic will soon lose any meaning.

GDP isn’t a perfect measure, but I think it’s a mistake to say it overestimates “real growth”. If anything, it underestimates it. In Off the Books, W. Michael Cox and Richard Alm point out that the statistic misses many of the improvements in living standards. Check it out.

Crossposted from Alex Singleton’s blog.

15 comments to Is GDP any good?

  • Sandy P

    12.3 trillion GDP is good, very, very good.

  • J

    12.3 trillion what?

    12.3 trillion Manats – Turkmenistan’s public spending next year?

    12.3 trillion won – The total R&D expenditure of the private sector of S Korea in 2001?

    12.3 trillion US Dollars – the total annual income of all members of Christian churches in the world?

    12.3 trillion Yuan – the total amount loaned by Chinese banks last year?

    12.3 trillion Yen – the total assests of Nippon Credit Bank in 1997? And also the forecast size of the Japanese business to consumer market in 2007?

  • Matt

    Defn of GDP : the market value of all the goods and services producted by labor and property located in the region, usually a country.

    Trouble is, the market value of labour provided by government employees is counted as positive for GDP calculations. So if one has 25% of the employed population working for the gov, then shouldn’t AT LEAST 10% of the GDP figure be subtracted? (In France’s case it would be more like 23.5%)

  • Jacob

    The GDP as an absolute figure is pretty meaningless. It is only good for comparison purposes – comparing GDP of different countries, or GDP in the same country over some years. It does not matter exactly how you calculate it, as long as you are consistent.

  • I’ve had the idea of implicit taxation, where money is printed to pay for goods & services the government needs, and direct tax is unnecessary. Clearly, there would need to be a limit on the amount printed, and government spending would need to be small and limited by a constitution.

    I’ve thought that GDP is a good benchmark, with potential government spending. A rate of ~3% of GDP seems reasonable to pay for courts, the military, police, etc.
    Obviously, just the basics cauld be afforded, which is good :)

    This implicit tax is a perfectly flat tax. Everyone’s [insert unit of currency] decreases in value equally.

    There is no dead weight loss in collection. There is no tax avoidence or shelter. Inflation is very low and more predictable.

    Is there a better measure to base this index upon than GDP?

  • Patrick

    Try telling the guy you just paid to make a new window, and the guy you paid to install it, and the guy you paid to transport it between the two, that there isn’t real growth there.

    What does he make of ‘not-broken window spending’? Ie replacing your DVD player even though it isn’t broken? Buying a bigger house when the last one is fine?

    Imho, that particular attack on GDP is really just a mutation of utterly stupid anti-consmuerist nonsense.

  • GDP isn’t so good at comparing across countries, because standard of living and exchange rates differ (across country, and across time). Maybe take a look at Purchasing Power Parity (PPP) too, which attempts to redress this by comparing how much it costs to purchase a particular set of goods. A simpler version (people like simple, hence why the GDP maintains its position) is the Economist’s Big Mac index, which compares the price of, uh, Big Macs. (In theory, the product doesn’t change across the world…)

    I can see the reasoning behind arguing against valuing “delinquency” as “value”, but in economic terms there’s no real difference between a kid smashing your window, shoes wearing out, or repairing a leaking roof. All are “maintenance”, and if you can’t afford to maintain, then that directly affects the country’s “value”. Trying to split value according to what “should” be spent and what people would rather not spend it on would be insane.

  • Richard Garner

    Patrick,

    I think you have missed the point of the broken window fallacy. The point is that the money that the shop keeper spends kixing his window is money he is not spending on other things, of real value to him. So, sure, by spending money on the new window he is employing a glazier, but he is not employing a tailor, etc, etc.

  • Patrick

    But with respect, Richard, you have. The point is that that piece of glass obviously is of more value to him than anything else because he is paying for that and not anything else.

    Just to prove the absurdio, as I thought my last post did: What if he upgrades to a thicker glass? What if it is broken, but only cracked-broken, and so he doesn’t replace it until it suits him?

    And how, short of arrant paternalism, do you ever calculate what is mere ‘broken-windows’ spendind and what isn’t?

    And what are you going to do with depreciation?

    And ultimately, back to where I started, how can it make an iota of difference if he is replacing his window or buying a donut or a new dvd player?

    I’ve heard of economics being divorced from the real world, but this is the first time i’ve met the beast outside of socialist pseudo-economics, and it is just as ugly outside as in.

  • Jack Maturin

    Hi Alex,

    You might like to take a read of the following article. It sets out to show the whole GDP thang is just another vision created by the Wizards of Oz in the central banking community to help us schlepping tax producers keep believing in their inflationist tax consuming need to run the Emerald City:

    What is up with the GDP? – by Frank Shostak (Mises Institute)

    Frank Shostak is one of the best writers I know of for making sense of the smoke and mirrors associated with central government counterfeiting, sorry, banking. You can check out all of his Mises.org articles, here:

    Frank Shostak’s Daily Articles for Mises.org

    Enjoy! ;-)

  • GDP is excellent at doing exactly what is says on the box. Measuring Gross Domestic Product. You might want at times to measure GNP, (national product) or GNI (national income), by MER (Market Exchange Rates) or PPP (Purchasing Power Parity exchange rates) or…
    One of the best is Net National Income (takes account of depreciation for example, ocerseas ownership of assets and so on) but it’s more difficult to calculate.

  • I agree with Tim. GDP is a measure of economic activity. It doesn’t claim to measure wealth created, only activity. If people are paid to dig holes and fill them in again (or any other pointless activity, of which much happens in the UK), that adds to GDP.

    The only problem with GDP is tghat some people use it for purposes it wasn’t intended.

  • Richard Garner

    Patrick,

    The point is that that piece of glass obviously is of more value to him than anything else because he is paying for that and not anything else.

    When presented with a highway man declaring “your money or your life,” you would probably give over your money because that would probably be the most valuable alternative to you. Are we to assume that wealth creation occurs here, then?

  • Robin Goodfellow

    There are several aspects to the “broken window” example, which always seems to get simplified to uselessness in economic discussions. On the one hand, replacing a broken window represents no net change in wealth or quality of living. On the other hand, it represents an improvement over a broken window. Windows do break, things do wear out, to some extent real wealth can be merely keeping things in good condition or maintaining a certain fixed quality of living. There can be no denying that bringing a house back to habitability quickly after, say, a hurricane or a fire is a perfect example of a benefit of wealth (which is dynamic as well as static). Similarly, the purchase of a loaf of bread or a gallon of gas both represent transactions of positive economic value, even though they are both consumed and don’t necessarily increase net wealth.

    Thus, I think GDP is actually a pretty decent measure of wealth and quality of living. Far from perfect, but worthwhile enough for to be relied upon for many uses.

  • Just to prove the absurdio, as I thought my last post did: What if he upgrades to a thicker glass? What if it is broken, but only cracked-broken, and so he doesn’t replace it until it suits him?

    What if he replaces the window with rock-resistant Lexan, and the next time the kid throws a rock at it the rock bounces back and hits him in the head, and the kid’s parents sue? This is something of an absurdio, in that in the case I’m familiar with, they couldn’t find a lawyer who would touch it, and so did nothing but bluster and call in a false report to Child and Family Services.