Gross Domestic Product
- 1 Discussion
- 1.1 Summary of Critique on GDP
- 1.1.1 1. GDP Excludes Non-market Activities
- 1.1.2 2. Some GDP-measured Expenditures Do Not Contribute to Economic Welfare
- 1.1.3 3. Stocks Versus Flows
- 1.1.4 4. GDP Ignores Distribution of Income and Consumption
- 1.1.5 5. Not All Contributors to Welfare are Economic
- 1.1.6 6. Technical Issues
- 1.1.7 Source
- 1.1 Summary of Critique on GDP
- 2 More Information
Summary of Critique on GDP
1. GDP Excludes Non-market Activities
All non-market activities are based on production and consumption that occur outside the market economy. Unpaid housework, childcare and most volunteer services can, with few exceptions, be purchased in the market economy. To a certain extent, leisure represents an individual choice in offering one’s labour services in the market economy.
The GDP is a measure of market activity; as such it excludes anything that does not have a price attached, as well as black-market activity. Unpaid housework, volunteer work, child care, barter and the illegal drug trade are only a few contributors to the economy that are not included in the GDP, even though most of these could be purchased theoretically in a market setting.
Ronald Colman, director of the Halifax-based GPI Atlantic (which is developing a series of indicators for Nova Scotia) points out that any shifts between market and non-market provision of these services and goods will be registered in the GDP, even though overall levels may not have changed:
- Because it excludes nonmonetary production, the GDP records some shifts in productive activity (from parenting to child-care, home cooking to eating out, unpaid to paid housework) as economic growth, even though these shifts may not alter total production. Conversely, recessionary times generally produce a shift of activity to the informal economy, which the GDP would register as a decline in production.(13)
On a macro level, the important variable is the total level of goods and services provided, whether in the GDP-measured marketplace or not. In this sense, the GDP provides only a partial picture of reality.
2. Some GDP-measured Expenditures Do Not Contribute to Economic Welfare
In some cases, looking at rises and falls in GDP does not provide an accurate, or complete, picture of overall welfare. If one were to use GDP alone as a normative indicator, then externalities, i.e., outside events over which we have no control – such as war, natural disasters and disease, and which lead to increased spending would be considered to be unambiguously positive inasmuch they increase economic activity. However, the GDP does not account for any welfare loss that results from an event such as a natural disaster or a toxic-waste spill, even though an environmental cleanup or reconstruction effort contributes both to welfare and the GDP. Relying solely on GDP as a normative indicator under such conditions will result in a “mismeasurement” of changes to social welfare because it does not take into account the negative events that triggered the economic activity: “Though ‘natural’ and ‘man-made’ disasters, crime and accidents all contribute to GDP in a positive way since these activities generate production “but they do not add to the well being of society.”(14)
If one were to use the GDP as the sole benchmark of progress, any increase in GDP would lead one to consider that overall well-being has increased. This leads to the following perverse situation:
- By the curious standard of the GDP, the nation’s economic hero is a terminal cancer patient who is going through a costly divorce. The happiest event is an earthquake or a hurricane. The most desirable habitat is a multibillion-dollar Superfund site. All these add to the GDP, because they cause money to change hands. It is as if a business kept a balance sheet by merely adding up all ‘transactions,’ without distinguishing between income and expenses, or between assets and liabilities.(15)
Other times, individuals undertake “defensive” expenditures that may reduce their quality of life. Some examples cited in the literature includecosts of commuting to work, and costs related to crime and accidents. Again, where these are involuntary (e.g., accidents), their positive contribution to GDP should be treated as described above. In voluntary cases, a judgement is required as to the degree – and even whether – something is a “negative” expense. For instance, long commuting times might be bothersome but could be redeemed either by a personal preference for living away from the city core or for listening to music during the drive. Or it might be a large annoyance bought on by a lack of available housing anywhere near one’s work. The point being, it is often difficult to claim such a factor is completely “negative” or “positive.”
3. Stocks Versus Flows
Because the GDP measures only flows, not stocks, the consumption of non-renewable natural resources such as oil counts as an addition to GDP, while the remaining stock of oil reserves is not valued as a stock. Natural resources should properly be treated as stocks that are drawn down when they are extracted and used. This would result in a clearer picture: when resources are discovered, they would be added to the “wealth” of the country, and subtracted as they are drawn down.
Although this does not show up in the GDP, the SNA does provide for some satellite accounts dealing with resource stocks, the reasoning being that – along with physical capital and labour – they comprise a nation’s stock of wealth.
4. GDP Ignores Distribution of Income and Consumption
The degree to which individuals and different groups share in a country’s prosperity is another indicator of economic and social well-being. GDP per capita, which divides the GDP by the country’s population, provides a rough estimate of each person’s “share” of the market economy. However, in reality, some people’s share of the economy is greater than others. This level and changes in inequality in the distribution of incomes and consumption, and the incidence of poverty, cannot be determined by tracking the GDP.
5. Not All Contributors to Welfare are Economic
Because the GDP measures only those items that can be priced, it automatically excludes things that are not in the economic sphere, such as a low crime rate, family stability and clean air. At the same time, “negative” costs such as pollution control, spending on burglar alarms and daycare costs show up as an addition to GDP even as they arguably contribute little, if anything, to overall welfare. GDP also does not capture investments in social capital, such as investments in communities or social institutions.
6. Technical Issues
Revisions to the GDP as a measure of market activity are ongoing, as our understanding of the economy changes. For instance, the differences between a capital investment and consumption remain a continuing debate – on the expenditure side, both are included as the same kind of activity. A capital investment, however, generates benefits into the future whereas consumption generates benefits only immediately.
According to Alan Greenspan,
- in today’s world it has become very much more difficult to figure out whether a particular outlay is expensed and not included in the measure of the GDP, or whether it is capitalized and it is. It’s an all-or-nothing operation. And as a consequence of that, having moved to capitalizing the software that is not embodied in the hardware, a major shift in the process of how one evaluates what we’re producing is occurring.(16)
Furthermore, several items contain elements both of consumption and investment, such as education. As Hawrylyshyn remarks, in this case, “One easy way out is to draw the line at either end: current GNP does so in favour of consumption NT and the JNNW (two other measures) do so in favour of investment.”(17)
- THE GROSS DOMESTIC PRODUCT AND ALTERNATIVE ECONOMIC AND SOCIAL INDICATORS. Prepared by: Blayne Haggart
- Book: Why GDP Doesn't Add Up. Stiglizt and co.
Critical GDP Bibliography
GPI Atlantic: www.gpiatlantic.org Redefining Progress: www.rprogress.org International Institute for Sustainable Development: www.iisd.ca (many links to various social and economic indicator projects) Canadian Council on Social Development Social Indicators Repository: www.ccsd.ca/repos.html United Nations Indicators of Sustainable Development: http://www.un.org/esa/sustdev/isd.htm (many links to various social and economic indicator projects)
B. Books and Articles
Anderson, Victor. Alternative Economic Indicators. London: Routledge, 1991.
Baker, Linda. “Real Wealth: The Genuine Progress Indicator Could Provide an Environmental Measure of the Planet’s Health.” In E/The Environmental Magazine, May-June 1999, Internet edition, www.emagazine.com/may-june_1999/0599feat2.html
Cobb, Clifford, Ted Halstead, and Jonathan Rowe.
“If the GDP is Up, Why is America Down?” Atlantic Monthly. October 1995. www.theatlantic.com/politics/ecbig/gdp.htm
Redefining Progress: The Genuine Progress Indicator, Summary of Data and Methodology. Redefining Progress, 1995.
Colman, Ronald. “Background.” In Measuring Sustainable Development: Application of the Genuine Progress Index to Nova Scotia, Progress Report and Future Directions. 16 January 1998, http://www.gpiatlantic.org/archive/background.html
Dale, Ann and John B. Robinson, eds. Achieving Sustainable Development. Vancouver: UBC Press, 1996.
Hawrylyshyn, Oli. “A Review of Recent Proposals for Modifying and Extending the Measure of GNP.” Statistics Canada. December 1974.
Henderson, D.W. Social Indicators: A Rationale and Research Framework. Ottawa: Economic Council of Canada, 1974.
Kuznets, Simon. “How to Judge Quality.” New Republic, 20 October 1962, p. 29.
Measuring Well-being: Proceedings from a Symposium on Social Indicators, Final Report. Canadian Council on Social Development. November 1996.
Nordhaus, William and James Tobin. “Is Growth Obsolete?” In Economic Growth, National Bureau of Economic Research General Series No. 96E. New York: Columbia University Press, 1972.
Organisation for Economic Co-operation and Development (OECD). Measuring Social Well-Being: A Progress Report on the Development of Social Indicators. The OECD Social Indicator Development Programme. Paris: OECD, 1976.
Statistics Canada. Econnections: Linking the Environment and the Economy, Concepts, Sources and Methods of the Canadian System of Environmental and Resource Accounts. Ottawa: December 1997.