Gross Domestic Product has numerous issues, especially as a measure of national-level standard of living. It is supposed to be a measure of total production and therefore the general health of an economy, but it falls short of this in many ways. In the US, the Bureau of Economic Analysis is responsible for estimating GDP, and their preferred estimation technique is to add up all consumption, investment, government, and net export spending (export spending minus import spending).
GDP ignores black markets and household production
Official estimates of total production are lacking because there is much of total production that isn’t counted. Some goods are not traded or not traded legally. For example, black markets in drugs, untaxed goods, prostitution, and copyrighted media aren’t produced, distributed, or traded legally, and so are absent from official GDP statistics. Estimates for the size of black markets range from 10-30% of GDP, depending on the country. It represents many trillions of dollars of spending globally.
Other forms of production are legal, but still not counted in GDP, like household production. I mow my own grass, which is production from an economic perspective, even though I’m not producing something for the market.
On this issue, feminist economist Joyce Jacobsen at Wesleyan University says that women are disproportionately underrepresented in GDP. Lydia Dishman at FastCompany reported on a recent talk by Dr. Jacobsen:
The result of this imbalance, according to Jacobsen, is a misrepresentation on a broader economic scale in the GDP. If work is unpaid, it isn’t included in “production,” and since women do the bulk of this informal work around the world, their contribution has been devalued.
I wouldn’t say that there is some sort of misogynistic conspiracy against women to underreport their production in GDP figures, just that GDP itself is flawed. There’s nothing to be gained by being counted in GDP, anyways. Employers do not consult somebody’s demographic group’s contribution to GDP to determine compensation. Wages are dependent on the employer’s anticipations of the laborer’s marginal revenue product and the value the laborer places on alternatives, whether that means working elsewhere or enjoying leisure.
Other flaws with GDP
Leisure is the source of another severe flaw with GDP. Leisure is valuable, but it is not produced or traded. Sometimes we willingly decrease our production because we value not working. We wouldn’t say that our whole economy is worse off because we choose to spend our nights and weekends reading, watching movies, playing sports, and sleeping. We would say that we are better off because we have demonstrated that we prefer leisure to the wages that could be earned by working 24/7.
There are still more issues with using GDP as a measure of macroeconomic health or as an indicator of standard of living. GDP, as one large monetary figure, says nothing about the distribution of goods and how they are being used in an economy. A whole economy could go on a massive consumption binge and neglect to maintain and replace capital goods, and the result would be an increase in GDP. This would not be a good indication for the future prospects of this economy, however.
In fact, even though GDP measures spending, the best indicator for future economic growth is its opposite: saving. It is only by abstaining from consumption that we can accumulate the capital required to undertake more roundabout and productive production processes.
GDP per capita is often used as a measure of the average citizen’s well-being, but what if much of that income in GDP is concentrated in the pockets of a few? When central bankers increase the money supply, incomes are concentrated and wealth is redistributed to the source of the new money through Cantillon effects. This artificial source of income inequality prevents us from being able to say that the majority of people in one country is better off than the majority of people in another country, simply because of a difference in the two countries’ GDP per capita.
Government spending should be discounted or subtracted
Perhaps the most serious problem with GDP is that it includes government spending as an equally legitimate component as the others. Government spending is categorically different because government spending projects are not subject to the profit and loss test of the market. Governments are notoriously wasteful — wasteful to an extent that could not persist on the market. Apple, for example could not blow $1.5 trillion on a project with no real benefits, at least with no benefits that can be calculated like iPhone sales. State Farm couldn’t profitably insure houses in floodplains against flood damage. Government agencies, programs, and enterprises only survive because they are heavily subsidized and protected from competition by law.
Economist Robert Higgs is a proponent of removing government spending from GDP calculations altogether. Writes Higgs:
Why should government product be excluded? First, the government’s activities may be viewed as giving rise to intermediate, rather than final products, even if the government provides such valuable services as enforcement of private property rights and settlement of disputes. Second, because most government services are not sold in markets, they have no market-determined prices to be used in calculating their total value to those who benefit from them. Third, because many government services arise from political, rather than economic motives and institutions, some of them may have little or no value. Indeed, some commentators—including the present writer—ultimately went so far as to assert that some government services have negative value: given a choice, the people victimized by these “services” would be willing to pay to be rid of them.
In conclusion, GDP has many issues that prevent it from being used as a reliable measure of total production or an indicator of a nation’s standard of living. Black markets, household production, and leisure are not taken into account. As just one dollar figure, it can tell us nothing about the distribution of incomes or whether an economy is primed for growth or decline. Finally, including government spending is dubious — it should be discounted at the very least, if not totally removed or even subtracted from a country’s production statistics.
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