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Debate: GDP as a measurement

Is GDP really the most effective marker of economic strength available to us?

Yes

Joe Grice
chief economist and director, Office for National Statistics

No

Trevor Williams
chief economist, Lloyds Bank Commercial Banking

 

Yes Joe Grice

Gross domestic product (GDP) is one of the most important of all economic statistics. It describes the sum total of the output – all the goods and services – that our economy produces. It measures the income the nation earns from that production and what we have available to spend, either to consume or to invest in capital for the future.

For this reason, GDP has immense importance in policy discussions and in public economic debate. The Bank of England uses it as an aggregate measure of activity in the economy – whether production is sustainable relative to the economy’s ability to produce that output, and without causing inflation (or deflation). The Treasury and the Office for Budget Responsibility use it to assess the state of the economy in regard to fiscal policy. In particular, they use it to judge the extent to which tax receipts and government expenditure are affected by cyclical factors.

Other countries attach the same importance to GDP, and detailed international conventions and regulations have grown up to govern its measurement and to maximise the comparability between GDP measures in different countries.

The ONS conducts an ongoing large-scale exercise to measure GDP. Each quarter, 6,000 manufacturing companies, 25,000 in the service sector, 5,000 retailers and 10,000 construction firms are surveyed. In addition government provides data on items such as health service, schools activities and energy production. This allows a first estimate of GDP to be published around 25 days after the end of the quarter, one of the fastest in the world.

No Trevor William

I agree GDP is a good measure of economic activity, and it does this very well. As an innovator of the methodology of measuring activity, the ONS is a great institution. We need to be able to track what is happening over time, to form judgements about society and its preferences. Unfortunately, GDP is too narrow a measure of society’s progress, changes in desires and needs. For that we need to think about wider issues than GDP measures.

Take standard of living, for example. GDP is often used to measure it, but it can fall even if GDP is going up because GDP does not tell you who is getting what or how it being delivered. You could have child labour for instance, or unsafe factories.Also, the total of GDP can go up, but some groups grab it all. What about adjusting for inflation in terms of incomes? What about the fact that living is more than just about money and what physically changes hands for cash? It is also about how it is done – sustainably or ethically, lifestyles, the environment, happiness, contentment, safety, lack of crime, community and courtesy to others.

Once people get to certain levels of income they want to do more than focus on growth, such as protect the environment, plant trees, have clean water and air. So growth leads to the point where people can worry over the other things.

Although GDP measures activity, some of the activity it measures can be bad, such as spending after a disaster. Not going to hospital because you are healthier and not needing so many drugs slows GDP growth, but does anyone think it is anything other a good thing? GDP is a flawed concept, though maybe the best we have at the moment.

Joe Grice

There’s a lot to agree with there, Trevor. But your comments also illustrate a common fallacy. GDP is a good indicator of what it is intended to measure; the aggregate output produced by our economy. Yet national accounting’s founding fathers – Hicks, Kuznets, Samuelson, Tinbergen – were always clear GDP was not a good measure of economic wellbeing, let alone a wider measure of social progress. That is not a criticism, just a warning not to use GDP for what it is not intended. It’s like saying a speedometer is of no use because it doesn’t show how much fuel you have. That’s why you need a fuel gauge as well as a speedometer.

Indeed, ONS recognises the need to have measures relating to issues such as sustainability, and wider social cohesion and wellbeing. Even in narrower economic terms, GDP is at best a partial measure of welfare. It tells you how much in aggregate we produce and earn as a nation. But it doesn’t tell you who benefits. Nor does it tell you whether the income we generate from the economy is sustainable or achieved only by running down our economic capacity – consuming at the expense of not replacing our infrastructure, for instance.

For these reasons, ONS instituted the Measuring National Wellbeing programme in 2010. Certainly, one can use these wider measures, together with GDP, to give more complete picture of social progress and wellbeing. But don’t discard GDP.

Trevor Williams

I recognise fully that GDP measures value add. The point is we should think about the focus on this one variable, GDP, and give other measures greater or equal prominence. This is not a criticism of GDP: just recognition that it was created for a purpose many years ago and that purpose, particularly in advanced economies, is losing relevance. One wonders what Kuznets, Hicks, Samuelson et al would make of it today.

The focus should be on measuring things that people are increasingly finding valuable. We should accept that there are wider measures of utility (for instance, how should GDP be measured in ageing Japan?) that should be given higher prominence.

I think the issues with GDP are recognised by statisticians, but GDP cannot be discarded – it’s about promoting other measures more widely.

Joe Grice

There is a lot in what you say. GDP remains essential as a measure of economic activity and value added, but it was not designed as a wider measure of wellbeing. I also agree that the attention focused on it since the financial crisis and recession deepens the danger of it being regarded as the single measure of national success or failure.

The ONS will raise the profile of wider measures of the country’s wellbeing. The Measuring National Wellbeing programme has brought together a range of such information structured around the “Wheel of Wellbeing”. These indicators have now been published for a couple of years. So far they have had only limited impact on national debate, but their usage and influence has been growing. The advocacy of commentators such as you will ensure these wider measures develop the importance in debate that they warrant.

Actually, there are already many statistics published that together provide a more comprehensive picture than GDP alone. For example, they assess sustainability. Are we maintaining our national infrastructure? Are we depleting our natural capital? They also show how national income is distributed – which sections of society are receiving the benefits.

In April ONS will start a structured publication of this material. Hopefully, it will contribute to a richer public debate, as you sensibly advocate.

Trevor Williams

I agree with your concluding comments. There are wider measures of economic wellbeing than GDP. The ONS has been aware of this gap for some time and has worked hard to produce estimates that capture a range of statistics that give a sensible measure of national living standards or wellbeing. But we must do more to ensure these estimates of nationwide wellbeing get more airtime and analysis.

A good start would be for the ONS to publish these regularly for the UK. Any international comparisons would be great and, more pertinently, publishing these estimates alongside the GDP might help raise the awareness of these estimates.

Originally published in Economia on 5 March 2014.