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

Posted in Uncategorized

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