Gross domestic product: Encyclopedia II - Gross domestic product - Controversies

Gross domestic product - Controversies

Although GDP is widely used by economists, its value as an indicator has also been the subject of controversy. Criticisms of GDP include:

• GDP doesn't take into account the black economy, where the money spent isn't registered, and the non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
• Very often different calculations of GDP are confused among each other. For cross-border comparisons one should especially regard whether it is calculated by purchasing power parity (PPP) method or current exchange rate method.
• Quality of life is determined by many other things than physical goods (economic or not).
• In 'poor' countries, it may just be that everything is cheap, except for a few western goods. So one may have little money, but if everything is cheap that evens out nicely. Thus, the standard of living may be quite reasonable, it's just that there are, say, fewer TV-sets, meaning people have to share them (which may actually increase the quality of life in a economic sense and choice, but decrease in a social sense for societies that value doing things together).
• If many products are of low quality in terms of durability then people will have to (unnecessarily) buy them again and again, thus boosting GDP without increasing their satisfaction. (On the other hand, if products were very durable then that would hamper innovation because people would be less inclined to buy new products, giving producers less of an incentive to develop them.) Similarly, if many products are of low quality in terms of usability and people don't know beforehand which products are the best choice for them, then they will either have to make do with an inferior product or buy again and again until they find something more satisfying. Furthermore, if products have a short lifespan in the market (eg because of fast innovation or fashion) then this process starts all over again when people need a replacement. Note that in a capitalist society these factors working together can easily cause a very high GDP combined with low customer satisfaction.
• If a nation doesn't spend but saves and invests overseas, such as Japan, its GDP will be diminished in comparison to one that spends borrowed money, like the US, thus accumulated savings and debt are not taken into account so long as adequate financing continues to happen.
• GDP doesn't measure the sustainability of growth. A country may achieve a temporary high GDP by over-exploiting natural resources or by misallocating investment. Oil rich states can sustain high GDPs without industrializing, but this high level will not be sustainable past the point that the oil runs out. Economies experiencing an asset bubble, such as a housing bubble or stock bubble, or a low private saving rate tend appear to grow faster due to higher consumption, mortgaging their futures for present growth. Environmental degradation at the expense of economic growth can end up costing dearly to clean up, GDP doesn't account for this in places such as China.
• GDP counts work that produces no net change. For instance, a hurricane destroying thousands of homes would not be counted by GDP, but the rebuilding of those homes would be. A good recent example would be the aftermath of 2005 Katrina hurricane, which is poised to become the most expensive hurricane in history. GDP would capture the rebuilding activity and suggest a rising living standard, but we're only working toward restoring what was lost for the most part. Therefore, GDP growth would over-estimate the increase in the standard of living. See Negative externalities.
• As a measure of actual sale prices, GDP does not capture the economic surplus between the price paid and subjective value received.
• the annual growth of real GDP is adjusted by using the "GDP deflator", which tends to underestimate the objective differences in the quality of manufactured output over time. (The deflator is explicitly based on subjective experience when measuring such things as the consumer benefit received from computer-power improvements since the early 1980s). Therefore the GDP figure may underestimate the degree to which improving technology and quality-level are increasing the real standard of living.
• Some economists such as Herman Daly consider GDP to be a poor measure even of material well being, especially in developed countries. They argue that GDP only measures production and consumption, not however the level of utility people gain from producing and consuming. This idea is expressed in the theory of uneconomic growth, which states that GDP growth above a certain "economic limit" actually decreases material well being. An extreme example of this is a major war. Historically, GDP growth was often boosted in war time while material living standards fell considerably.
• GDP does not take inequality into account.

Some economists have attempted to create a replacement for GDP called the Genuine Progress Indicator (GPI), which attempts to address many of the above criticisms. Many nations calculate a national wealth, a sum of all assets in a nation, but again doesn't account for future obligations such as environmental degredation, asset bubbles, and debt. Other nations such as Bhutan have advocated gross national happiness as a standard of living, claiming itself as the world's happiest nation.

Adapted from the Wikipedia article "Controversies", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki