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Friday, October 31, 2014

Is GDP the Best Measurement of Economic Growth?



Numbers are only representations of ideal states and are in and of themselves subjective to what they measure. A paper by Stow & Stow (2013) discusses some of the fallacies of relying too heavily on Gross Domestic Product (GDP) without considering the deeper meaning of the numbers. Fallacies of judgment can occur when governments adjust their economy to improve upon GDP but don’t look at actual economic activity.

GDP is calculated by adding =C+I+G+NX. Any improvement in consumption (C), Investment (I), Government Spending (G) and Net Exports (NX) would result in an improvement in overall GDP. The numbers could be misleading in the long run and lead to poor policies decisions.

When consumers spend more money they are not necessarily improving total wealth of the nation even though GDP rises. They are simply spending their money, dwindling their savings, buying now instead of investing later, and taking on debt. They may be encouraging organizational profits but not exclusively the wealth of the nation as an entire economic system. 

A similar fallacy can be found in government spending where an increase in expenditures can raise GDP numbers that don’t actually reflect national growth. Spending more today has obvious costs in terms of debt, flexibility, and confidence that are not calculated into the factor. Spending should be in areas that improve overall wealth or reduce liabilities. 

The paper is solid in the sense that numbers are only just numbers and relying on them too heavily can lead to policy mistakes that can be costly down the road. Overreliance on a single number encourages greater government spending and interventionism that can be self-perpetuating as politicians seek to justify new and expanded budgets at the detriment longer term sustainability. Using a battery of different numbers can help provide a greater context more data points to understanding true growth and development. 

Strow, B. & Strow, C. (2013). Gross Actual Product: Why GDP Fosters Increased
Government Spending and Should Be Replaced. The Journal of Private Enterprise, 29(1)

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