GDP Sure Stinks as Our Go-To Measure of Economic Activity

Measuring the size of national economies is hard.  That’s clearly true in the case of developing countries, where underlying economic data is often not available, made-up, or deliberately manipulated.  But even for rich countries it’s difficult to know how to factor in all the different kinds of economic activity humans engage in.  How should the value of multinational corporations be divvied up across the various countries they are present in?  How should public goods provided by the state be valued?  Should you attempt to measure non-market transactions, like the labor traditionally provided by “stay-at-home” mothers?  What about accounting for negative externalities, like the increasing threat of climate change?  What base year should you use?  And how should you deal with (highly variable) exchange rates?  The Economist recently asked if Brexit had helped France’s economy overtake the U.K.’s, and the best it could come up with was a tepid “probably”.

Every now and then methodological changes by national statistical authorities visibly highlight the artificiality of GDP figures. Consider the following few cases:

  • On November 5, 2010, Ghanaians went to bed thinking their country had a GDP per capita of about $753, placing them among the poorest countries in the world.  The next morning they woke up, however, to newspaper accounts proclaiming that the National Statistics Office had changed the base year for calculating GDP from 1993 to 2006, which (along with other methodological changes) had caused the country’s per capita GDP estimate to jump to $1318.  Overnight Ghana had become a solidly middle-income country!  Woohoo!
  • A recent European change in the way the investments of multinational corporations are counted in GDP figures caused Ireland’s GDP to grow by 26% in 2015…  at least on paper.  But, as an economist at University College Dublin tactfully put it, “It’s complete bullshit!”
  • Speaking of bovine shit, India’s 2015 GDP revisions for the first time officially included the value of the “organic manure” that the country’s livestock produce.  Just like that, India’s GDP increased by 9.1 billion rupees (roughly $135 million), but not before some serious academic work had been done calculating the “average evacuation rates” of various species (who says academics never have any fun!).  The Wall Street Journal has a good primer on India’s new GDP figures… and how other “real-world” statistics like the quantity of exports don’t seem to corroborate them much.

Perhaps the solution, then, should be to just get rid of GDP altogether, as more and more people are suggesting.  But then how would the hordes of quantitatively-minded political science Ph.D.s indulge in their favorite pastime of building econometric castles out of data made of sand?

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