With this morning's stagnant GDP data now out it seems worth sharing another entry from the forthcoming glossary, or guide to keywords in political economy, that I am writing.
This is the proposed entry for GDP. The questions are:
- Is it useful?
- Could it be improved?
- How?
When published it will have links to gross national product and GDP per capita, both of which have already been written as well. 4,000 words were added to the draft yesterday.
Gross Domestic Product (GDP) is a measure of the economic output of a country. It is the total value of all goods and services produced in a country in a period, irrespective of who produced them.
The method for computing the GDP involves statistical inference: it is not an accounting process. The GDP is usually expressed in the national currency. GDP is most commonly calculated on an expenditure basis, as follows:
GDP = consumption + investment + government spending + (exports − imports).
This is commonly written as:
GDP (or Y) = C + G + I + (X-M)
GDP can also be calculated on an income and output basis. National statistical authorities reconciled the three bases before publishing their estimates of GDP.
Gross domestic product (GDP) is considered by many to be a flawed definition of the income of a country. This is because it only measures that income which results in monetary transactions. In very many countries significant amounts of labour are expended on matters which never result in monetary payment, e.g. childcare, care of the elderly, unpaid work in growing and cooking food, on care of the household, and so on. None of these activities (many of which are often undertaken by women) are reflected in GDP resulting in both its understatement and the contribution of women to it being understated.
In addition, GDP also records the value of transactions even though they might add nothing to the net sum of human well-being. For example, the GDP of Alaska rose considerably after a major environmental accident on its shores that resulted in significant oil pollution but this did not improve the well-being of people in that state.
GDP as a measure also fails to take into consideration the distribution of income within a jurisdiction and is, as a result, a poor measure of individual well-being, to which it will rarely approximate.
GDP also fails to measure the cost of externalities arising in the course of much economic activity meaning that, for example, the cost of environmental damage resulting from routine economic production is not taken into account in its calculation.
Measures of GDP should, therefore, be treated with care. As the late Senator Robert Kennedy said of GDP before his assassination in 1968 “[GDP] measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.” There was much truth in his claim.
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GDP =
Grossly
Depleted
Planet
That’s where GDP measurement has got us. As Mark Carney said, we only value land, elephants etc., when we’ve deforested it or killed them and turned it/them into something that can be exchanged with money and exploited. We never place any monetary value on them beforehand, as they are, to weigh up any loss of the transformation into a commodity.
GDP is selective and biased. Or how about just ‘crap’?
That will be added to the entry
Ha ha, very good PSR, “nice”
This is very helpful. It is written in a much more concise and objective way than yesterday’s example – though that may be because of the topic.
A little more could be said to explain:
“GDP can also be calculated on an income and output basis. National statistical authorities reconciled the three bases before publishing their estimates of GDP.”
Keep up the good work.
P.S. will you be sending the finished product to economic journalists?
Yes
I decided against that complication because those methods get much less attention
I like this very much.
At risk of making it longer and less focussed, I’ll mention a few things you might want to consider adding.
Estimates for the value of unpaid labour run from around 20% to around 70% of GDP. Around 50% seems pretty likely.
You could mention the factors on a more balance scorecard of how well a country is doing, such as inequality and wellbeing. (But no, politicians prefer to boil it down to this one particular flawed number and then generalise. And also set targets for GDP, which Goodhart’s Law tells us will make it even less useful as a measurement.)
There is a nice quote from the inventor of the modern concept of GDP, Simon Kuznets, in 1934: “The welfare of a nation can scarcely be inferred from a measurement of national income”. Even as he was inventing it, he realised politicians would abuse it.
I should have added in the post on GDP per capita where I mention these things in greater depth
Mu be I should nit worry about some replication
Thanks
Happy to read it in pieces like this 🙂
Do you have one on “recession”?
It seems everyone accepts as an article of faith that two quarters of negative growth in GDP is a “technical recession” but that was only one of the factors mentioned by Julius Shiskin – Commissioner of the US Bureau of Labor Statistics – in a “point of view” article published in the New York Times in 1974. https://www.nytimes.com/1974/12/01/archives/the-changing-business-cycle-points-op-view.html
Is it just the UK that adheres to this “technical” definition?
As I understand it, in the US, everyone looks to the National Bureau of Economic Research (a private research organisation, or think-tank if you prefer) to determine when US recessions start or stop, looking for “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
Shiskin refers to the NBER’s broad view in 1974, and and then says:
“A rough translation of the bureau’s qualitative, definition of a recession into a quantitative one, that almost anyone can use, might run like this:
In terms of duration—declines in real G.N.P. for 2 consecutive quarters; a decline in industrial production over a six‐month period.
In terms of depth—A 1.5 per cent decline in real G.N.P.; a 15 per cent decline nonagricultural employment; a two‐point rise in unemployment to a level of at least 6 per cent.
In terms of diffusion—A decline in nonagricultural employment in more than 75 per cent of industries, as measured over six‐month spans, for 6 months or longer.”
Somehow, for some reason, we’ve fixated on the first of his three items.
Shiskin continues: “The bureau’s reluctance to adopt such specific criteria arises from an easily understood desire for flexibility when, the various combinations of these and related data indicate that a recession has or has not occurred on the basis of small misses.”
And then: “The bureau’s definition of a recession is, however, known to only a small number of specialists in business cycle studies. Many people use a much simpler definition—a two‐quarter decline in real G.N.P.”
Most readily available sources refer back to Shiskin, but I wonder if anyone else had written before about that “much simpler definition” before 1974. For example, here is a US Senator saying something similar in March 1974: https://books.google.co.uk/books?id=YivsAAAAMAAJ&pg=PA75 (the comments there could have been made by a politician this year, including reference to the possibility of a “future wage-price push”)
I have recession in
I think these technical definitions need revisiting
Yes, that is a very good exposition; not least because it is clear, simple and easy to understand.
Perhaps it is worth going on to explore how business (the enterprises that make up ‘markets’, and are the focus of neoliberal obsession with GDP) measures its activities. The measurements use the instrument of accounting, and what is measured is very selective; framed by the interests of the business. Each business will not measure its pollution or its detritus (or anything inconvenient it can avoid paying for), unless it is obliged to do so by Government regulation. And lo, neoliberal politics spends half its efforts braying against ‘red tape’ and regulations ‘holding business back’ (meaning having to record costs it would otherwise escape free from paying). A new market is then created cleaning up the mess of waste and pollution, profiting private enterprise, and always at the cost of the already strapped public purse.
The irony here is that the neoliberals do not want the increase in public debt from cleaning up the mess their businesses make, allegedly so the cost does not fall on future generations (as if their real concern was nothing to do with the impact on profits if they had to clean up the whole mess, for example from every closed business or factory or industrialised site).
Why are our cities scarred by the blight left by dead businesses, or even industries? Because they never pick up the tab for their real cost. Private enterprise just walks away from the mess. The public sector has to accept the responsibility; until neoliberal politicians refuse to accept the cost of cleaning up their mess by an increase in public debt. The result in Britain is that we live in blighted cities, weighed down still by the mess created by the Victorians; or living off the Victorian infrastructure we are still using, because neoliberals still do not want the public cost of replacing it.
It is called “limited liability”. Private enterprise does not pick up its full cost of operating, measured to is demise. It can’t. It would go out of business. It simply doesn’t account for it. Therefore in our daft world, it doesn’t count. The public sector, however escapes nothing. It carries the can for everything. The whole ludicrous game is a farce. We create an illusion of reality by playing a game of fake measurement that deceives a public long trained to see only what it is fed by a frankly daft neoliberal ideology.
Neoliberals prefer creating the mess that future generations will have to clean up (and the endemic generation long health problems created for millions); when the future generations would prefer the world they inherit to be free of the pollution, and of the catastrophic climate change that is coming their way. The debt, they can handle; because – we had to do the same, typically reasonably well.
I hope to address all these issues within the glossary which is now over 43,000 words, with more than 20,000 of those being written this week.
I admit to enjoying this exercise.
Richard Murphy you are glutton for punishment!
Thank God!!
Dear J S Warren, you have raised some very valid points that apply particularly to the decommissioning of outdated nuclear power stations. The advocates of nuclear power ignore the tremendous costs of decommissioning and dealing with the intractable problem of radioactive waste that will be a tremendous burden on future generations for thousands of years to come (unless some techno-fix can be found but looks extremely unlikely). The costs of course will be borne by the public/government as the energy companies wash their hands of their responsibilities.
“National statistical authorities “reconciled” the three bases before publishing their estimates of GDP.”
Reconciled? What do they do *now *?
Another excellent entry if I may say without sounding condescending. I think it was Roger Penrose who wrote, “The maximum number of equations in a non-fiction book for the general public should not exceed five.” (Maybe I paraphrase.) I’ve seen the equation before, but without an accompanying explanation. Thank you for giving the two together.
The use and in some cases the triumphalist tone of media reporting on GDP, is a propaganda weapon to lull the population into a false sense of well-being and even personal prosperity. As you point out, the lack of relevance to income distribution is a key factor in evaluating the usefulness of this measure for ordinary people. The degree of exploitation of labour is ignored, and the rape of the natural world is ignored, whose health is what our very survival and life chances are dependent upon.
GDP = consumption + investment + government spending + (exports − imports).
Is trading via freeports included in the GDP calculations?
Are freeports included in your glossary?
Yes they are in both
That looks pretty good. But I miss the point that an NHS surgical operation has no value while a private surgical operation is included in GDP. Is there room for that, because it seems so clear, or would it get too unweildy?
You have that wrong
An NHS operation is valued at cost
A private operation is valued at market value
As someone likely to use your glossary – i.e. someone without any formal economics background – one thing that is missing from your definition is an indication of how GDP deals with inflation (or doesn’t).
For example, I can’t tell whether the recent GDP figures showing no change since the end of 2019 represent a flat performance or a 15% or so decline. That is quite a big difference when trying to make sense of newspaper reports.
[To be fair, I realise that the items included in GDP form a very different “basket” from those used in published inflation measures, so an answer may not be altogether straightforward].
I will add it
Good point. We nearly always mean Real GDP when we say GDP….. but you should distinguish between real and nominal. However, I would be reluctant to go down the GDP deflate versus CPI rabbit hole.
I have now added a section on the GDP deflator and linked the two.
To an economist it may be obvious, but it seems to me that it might be preferable to make it expliciit in your summary definition that GDP applies only to monetary output. I know you qualify this later, but to me it is a fundamental part of and flaw in the GDP concept that it covers only transactional monetary activities.
That it also implies positive value in useless and wasteful activities is where boundaries become more difficult to define. But all definitions of ‘output’ or ‘efficiency’ (other than in very narrowly defined engineering contexts) represent inbuilt value judgements, so it’s maybe as well to face that at the start.
Thanks
Excellent entry.
In my view it hits the spot far better than yesterday’s on Austerity .
Yesterday’s has now been edited.
I do take note….
Does GDP still include estimates for the transaction values of prostitution and illicit-drug dealing?
Yes
Here is a thought from somewhere way out in the stratosphere. I do not know exactly how many terms are in the glossary. A large number no doubt. Therefore, if you chose, say the twenty or thirty that you felt were most ‘ctitical’ (as in important – at least for the general public), why not provide them here (on, say a one-a-day basis – or whatever suits you) and allow the discussion to develop.
I suggest this because I think the first two seem to have been hlepful to you, and have called on a wide number of people; too many to manage on a one-to-one basis, I suspect. I also think, like almost all thinking, it is not the result that counts, but the illumination provided by the process. And the process here has been refreshing. Social media at its best, for the first two anyway (and you can just excise the trolls, if they show up).
I hope to do that
There are now hundreds of entries
I will reflect on what to do next
It may not be tomorrow – I may want a day off. 24,000 words on the glossy alone this week has been one heck of an effort.
Who the hell (other than your echo chamber) is interested in reading 24,000 words !!
You are on the old ego train again it seems..
227,000 Twitter followers
More than 2 million reads here a year
Some echo chamber, don’t you think?
I’d almost say you were jealous
Twitter is like fast food or tinder not for 40 odd thousand word consumption, the vast majority won’t read or have interest.. yes it’s the ego train as you desperately seek acceptance. Jealous, well i rum my own business with 16 employees producing things and creating wealth and employment for others. But that’s what i choose to do, you choose to tap away on twitter..
And you are sad enough to write petty comments here
I think you need to get a life
“Who is interested in reading 24,000 words”?
People who think reading is worthwhile.
Steve, it clearly isn’t for you; and neither is this blog. If you ever discover a real interest in reading, or thinking beyond making yourself money, do drop in again.
“GDP = consumption + investment + government spending + (exports − imports).”
Thus virtually meaningless without the breakdown of the constituent elements. Like saying balance sheet assets consisting of Debtors 100 Cash 0 is the same as Debtors 0 Cash 100 because they both total 100. Nope.
I would suggest the number of people who could produce that precise formula, if stopped by an intrepid BBC reporter on the streets of England and asked if they know what GDP is, would be fewer than 1 in a 1000. Which begs the question, why bother mentioning it on the news at all? What are the general public supposed to do with headline GDP information? Laugh? Cry?
I have A level economics and studied it as a small part of my master’s but still wouldn’t for the life of me have remembered the formula if I’d been asked yesterday. What chance Fred Bloggs? And if Fred did know the formula I’m sure he’d say the headline figure was useless without the breakdown of its constituent elements.
GDP obviously merits a position in the top 20 or 30 terms for entry into any economic glossary, but only due to its artificial level of ‘fame’ rather than it being particularly useful or interesting.
I get your point
But isn’t that the point of mentioning it here?
Surely any glossary entry on Growth needs to reference “Limits to Growth” by Meadows etc published in 1972? Exponential Growth is toxic to natural systems. Steve Keen is well aware of this.
There is also the political economist Boulding who said “Anyone who believes in Growth is either mad or an economist.”
Green Party’s Sarah Parkin said that she stopped believing in economic growth at the same time she lost her belief in the tooth fairy.
Interesting
Another entry to add…..