There is a broad consensus on the idea that Gross Domestic Product (GDP) is a very useful indicator for measuring economic growth. However, it has many limitations in determining the quality of growth and measuring economic development. Let’s reflect on it.
Statistical organizations, through the National accounts, offer the measurement of the Gross Domestic Product. In Spain, the National Institute of Statistics has this competence, following the methodology of Eurostat.
GDP measures the market value in monetary units (euros, dollars, yen, etc.) of the production of all final goods and services carried out by domestic and foreign factors of production within a country. It is calculated in a certain period of time (a quarter, a year).
What information does it provide?
The value of GDP tells us the size of the economy. For example, the Spanish economy reached 1 121 948 million euros in 2020.
The GDP variation rate shows the economic growth or decrease. In other words, it gives us information about the business cycle. For example, the Spanish economy grew 2.7% in the third quarter of 2021 compared to the same quarter of the previous year.
GDP allows us to contextualize other economic magnitudes. For example, it does not contribute much to say that the Spanish public debt is 1,345,800 million euros, but it is important to know that it is more than 120% of GDP in 2020 according to Eurostat.
Furthermore, expressing economic phenomena as a percentage of GDP allows international comparisons to be made without being affected by the size of the countries. For example, how do we compare Spanish debt (1,345,800 million euros) and German (2,314,333 million euros)? German debt is higher in absolute terms, but is it a more pressing problem for Germany than for Spain? In this case the size of the economy does matter. Debt in Germany accounts for 69.7% of GDP compared to 122.8% in Spain.
What does GDP not measure?
The GDP does not include externalities, nor the economic activities of the informal market (for example, the service provided and paid without invoice), nor the unpaid work (often linked to household care), nor self-consumption (in the case having a garden). However, all of this is also part of the economic activity of a country.
Since 2014, following Eurostat guidelines, the INE has made a estimation of illegal activities such as gambling, smuggling, prostitution or drug trafficking.
GDP also does not include the distribution of wealth, nor the measurement of social and environmental justice, as discussed below.
GDP is useful, but it serves what it does
Its advanced methodology allows to know how the economy behaves without much delay. At the end of January, a preview of the GDP information for the last quarter of the previous year is available and in September the statistics on the evolution of the economy in the previous year are published.
On the other hand, GDP has become a reference variable in international comparisons due to the great methodological similarities in the way it is calculated.
But GDP is good for what it is for. Do not make the mistake of extrapolating conclusions that cannot be drawn from it. It does not measure the transformations that affect society, people’s well-being or their relationship with the planet. That is why it is necessary to consider other indicators that measure what GDP cannot measure.
Where do we walk
After the financial crisis of 2008-2009, pressures to move beyond GDP in measuring the economy increased. In the same year 2008 the Commission on the Measurement of Economic Development and Social Progress, led by economists Joseph Stiglitz, Amartya Sen. and Jean-Paul Fitoussi, whose discussion continues ten years later with the report “Beyond GDP”From the OECD.
The Agenda 2030 and the establishment of indicators To measure each of the goals of the Sustainable Development Goals, they respond to this concern of measuring something more than mere economic growth.
In Europe they are working on a multidimensional indicator to measure quality of life that collects all these ideas embodied here.
How do we measure development and inequality?
GDP, like per capita income, makes it easy to observe the accumulation of wealth in the population. However, it does not provide information on the distribution of that wealth. It is necessary to complement this indicator with measures of equality such as Gini index, the 80/20 coefficient, and calculations of absolute and relative poverty.
For his part, Human development Index (HDI) of the United Nations Development Program (UNDP) complements the rest of the indicators. It incorporates health and education variables of the population into the per capita income. Therefore, it moves towards a measurement and concept of development and not only of economic growth. However, it also has criticisms, such as that it makes the problem of inequality invisible. Therefore, the HDI corrected for inequalities. There are also other variations to see development with a gender perspective, the effect of gender on inequality o la multidimensional poverty.
The other relevant issue that GDP forgets is environmental sustainability. Since 2020, the HDI incorporates in the measurement emissions and ecological footprint.
There is a wide repertoire of indicators that take us into the measurement of development and that complement the vision given by GDP. Among them we can highlight the Social Progress Index, the Happy Planet Index or the OECD Better Life Index, among many others.
Final thoughts
The theoretical references on which the measurement of the economy is built are behind the deficiencies in GDP. The prevailing orthodoxy in recent decades has ignored that growth and development are not synonymous. Development includes aspects of human, social and environmental well-being.
The value of GDP as a current meter is undeniable. But the structural changes of the economy and society over time are more complex. For this reason, the analysis of economic processes must be supported by a battery of indicators that includes social and environmental aspects.
At present, it seems far away to reach an international consensus on a composite indicator that includes variables under the criteria of the sustainable development goals. But it’s not impossible. In this sense, the new indicators on quality of life, as well as the HDI in its improved versions, are valid options. It is our responsibility as economists to give them greater use and dissemination in their different versions.
Laura Pérez Ortiz, Professor of Economics. Socio-Economics of Labor Research Group (SET-LASE), Autonomous University of Madrid; Ana Isabel Viñas Apaolaza, Professor of Economics. Dep. Economic Structure and Development Economics., Autonomous University of Madrid and Ángeles Sánchez Díez, Department of Economic Structure and Development Economics. Coordinator of the Study Group on the Transformations of the World Economy (GETEM), Autonomous University of Madrid
This article was originally published on The Conversation. read the original.
Reference-www.eleconomista.com.mx