There was an insightful article in Time magazine last week that questioned whether real Gross Domestic Product provides us with an adequate measurement of the economic status of America, and more importantly, the typical American. With our economy under a powerful microscope by not just us but the world at large, it’s pertinent to ask: Do transactions incorporated into GDP really resemble the preservation and growth of our standard of living? (It will become clear throughout this column that by “standard of living” I do not just mean monetarily but intrinsically as well.)
GDP measures the market value of all final goods and services produced within a country annually. Quarterly measurements of GDP are revised at least three times within a year. The figures are approximations, never absolute, and numerous forecasting models are employed in an attempt to plot economic movement. We constantly hear on the news that United States GDP grew by (fill in a number of your choice below five percent), or that China’s GDP is consistently twice that of ours. Yes, this tells us that our economy is producing more stuff. But what does it reveal about Average Joe?
There are lots of activities that could be considered “economic,” which are not accounted for when measuring GDP. The Time article lists the depletion of natural resources, physical (and mental for that matter) health of a country’s citizens, and the notion that money is not necessarily synonymous with happiness. I would add to this list: those who volunteer their time or material things, the raising of children and unpaid maintenance of a house or perhaps small business.
There is also the problem of GDP including not just the expansion of wealth, but the rebuilding of it. Take New Orleans, for example: Production in that area isn’t new; however, GDP doesn’t recognize the difference between new growth and the reproduction of old growth. This will result in the basic maintenance of our current infrastructure representing a greater percentage of GDP each year, consequently painting an erroneous picture of what new wealth has really been added to a given country.
The holier-than-thou United Nations has created a Human Development Index in an attempt to measure what GDP considers valueless. The United States ranks 12th while Iceland is on top. The committee uses models – some complex others basic – to determine levels of health, literacy and poverty. I disagree with its methodology. While health and literacy are driving forces in production, attempting to determine the degree of influence they hold over a particular economy is impossible. Take for instance France, ranking 10th in the Index; that’s two spots ahead of us despite its unemployment rate being twice that of ours.
At first glance it may seem that GDP doesn’t represent the capacity of a country’s population, or the true wealth one has created. The problem we run into when trying to adjust our focus on what economic growth truly is – attempting to incorporate what is not defined as a “transaction” – is that we are unable to assign a monetary value to that which is not included in GDP.
Some of you may think it unimportant to place such a value on everything. You’re wrong. It is. I don’t want to spend too much time discussing this because it could take up the rest of my few words, so despite what every inkling of your body may be telling you, trust me when I say that money matters. Suffice it to say, we need a common system of communicating the need or want we have for certain things, and money is it.
To apply a monetary value to, say, a mother, would not only be degrading, it would be completely arbitrary. A mother may be worth more to you than me, or vice versa. I am reminded of a class about a week ago when a student called for property owners to be taxed if they cut down trees on their own private property; as I retorted in class, who determines the value of a tree? And if you really want to get complicated, what if it is used to build an institution which teaches sustainability? Does that tree become worth more or less? The same is true when measuring our economy. We can’t place a value on health, volunteer work, a homemaker or the depletion of oil, natural gas and mineral reserves.
I don’t believe GDP paints a complete picture. It would be difficult for any form of economic measurement to provide the detailed blueprint some call for when dealing with an eleven trillion dollar economy. Instead, we should take real GDP at face value. Understand it represents transactions and in the correct context it will always provide us with a decent economic outlook.
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Gross Domestic Product not an accurate reflection of our economy
Daily Emerald
April 21, 2008
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