Archive for January 2010

GDP Problem #2 – Measuring the wrong thing

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What is GDP?  Basically, it is what is spent (by people, businesses, and government) on a country’s goods and services over the course of a year.  There are various ways to calculate GDP, but theoretically they should all come up with essentially the same number.  But what is the reason for such an esoteric number being so ubiquitous in economic discussions?  It is being used as a proxy for the value a given economy has created over a certain period of time.

In a “perfect” economy, with rational people making rational decisions, no corruption, waste, etc., this would be fine – what is spent would be a good (the best?) approximation of the value created.  However, how much ‘value’ is created when the government pays people to not plant crops?  How much value would the “Bridge to Nowhere” have created, and at what cost?  Of how much value is an unsafe, unfinished, unusable 3.9 million sq. ft. building upon which was spent an estimated ~$750 million?

This problem with GDP is also well known by experts and many others.  For example, this is from an article in the New York Times last year, by Harvard economist Gregory Mankiw:

neighbor for $100 to dig a hole in your backyard and then fill it up, and he
hires you to do the same in his yard, the government statisticians report that
things are improving. The economy has created two jobs, and the G.D.P. rises
by $200. But it is unlikely that, having wasted all that time digging and filling,
either of you is better off.”

The problem with using some measure other than GDP is that any replacement number would likely be much more complicated to arrive at, and also be much more subjective.


Written by Jim T

January 30, 2010 at 7:49 pm

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GDP Problem #1 – False reporting

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You would think after what happened with the USSR, this would be blindingly obvious.  Communist countries lie about everything – especially their economies.  The Soviets in the 80’s couldn’t keep their grocery shelves stocked with much of anything, and it was not unusual for huge lines to form for basics like bread and and even toilet paper.  Their grocery shelves often had more bare space than products.  Yet you had famous Harvard economist John K. Galbraith saying in 1984:

“That the Soviet system has made great material progress in recent years is evident both from the statistics and from the general urban scene. . . . One sees it in the appearance of solid well-being of the people on the streets . . . and the general aspect of restaurants, theaters, and shops. . . . Partly, the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower.”

A Nobel prize winner in Economics from MIT,  Paul Samuelson in 1985:

“What counts is results, and there can be no doubt that the Soviet planning system has been a powerful engine for economic growth. . . . The Soviet model has surely demonstrated that a command economy is capable of mobilizing resources for rapid growth.”

They were far from alone.  So after such a colossal disconnect between the reported figures and the reality, people would learn their lesson, right?  So why is the economic information that China puts out today, by and large, treated as though it were reliable?!?


Written by Jim T

January 27, 2010 at 11:12 pm

Posted in Uncategorized