Gross Domestic Product, the broadest measure of the goods and services produced across a country, has widely been used to measure the general health of a country’s economy. Often cited in the news, as well as reports by governments, politicians, central banks, and the business world, the real implications and conclusions that can be drawn from such a measurement are often overlooked. As a staple in the arsenal of any Economics, PPE, HSPS, and Economic History student dealing with economic issues on a national or international scale, we thought we’d provide a little overview of some of the major talking points that you may have never considered.
For a start, politicians love GDP. Polling has shown how intricately tied political popularity is with the measurement of GDP. But it is also important to understand what GDP cannot tell us. Simple percentage increases fail to provide a full representation of how the economy affects the population itself, or the overall standard of living of a country. While the Coalition may talk about a 0.8 per cent increase between April and June of 2014, little is made of the fact that GDP per capita (which takes into account population growth) is still lagging 5 per cent behind the last peak. Even GDP per capita misses significant environmental or external costs. This is why the United Nations uses a Human Development Index, which ranks countries not only based on GDP per capita, but on other factors, such as life expectancy, literacy, and school enrolment.
In fact, many economists are not completely comfortable with the reliance on GDP measurements at all! Some have doubts over the reliability of models that are at the mercy of constant adjustment. As John Mauldin, Chairman of Mauldin Economics, suggests: ‘’GDP is one economic model among several that could serve the purpose, but its use conveniently leads to policies that reflect the thinking of a particular school of economic monetary and fiscal policy advocates.’’
In recent news, major changes have occurred in the calculation of GDP. In previous measures, government spending was defined simply as consumption from governments. Proposed changes this year, however, mean that the way the size of the British economy is calculated will include a new treatment for weapons and other items that can significantly increase estimates for previous years. Some of this spending will, therefore, now count as investment – with the increased government investment in military weapons and equipment adding £3.5 billion to GDP for 2009 (according to the Office for National Statistics). Given that some of this weaponry is extremely expensive, a large loss (like that of an aircraft carrier) would deal a severe blow to GDP. So next time you hear your economics A-level teacher claim GDP does not include depreciation, don’t forget that measuring government output involves taking the sum of its costs, and one of those costs is depreciation.