For those of you following the news, you may have heard of the whopping US Gross Domestic Product (GDP) decrease last quarter, estimated to be a contraction of 1%. Now 1% may not seem like a big deal, but 1% of the US GDP is a significant amount of money. Personally, what’s the big deal? Actually quite allot. The GDP measures the market value of all officially recognized final goods and services produced within a country in a year, or over any given period of time. When the economy grows, the GDP grows with it.
When the common person thinks of the GDP, they think of the health of the economy. Therefore, when the GDP decreases, we tend to think that the power and health of a country is decreasing.
The GDP was originally developed by Simon Kuznets for a US Congress report in 1934. Kuznets warned against its use as a measure of welfare. However, the GDP became the main tool for measuring a country’s economy in 1944.
So lets talk about problems:
The GDP does not take into account the externalities of harm to the environment.
The GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated.
The GDP does not take into account the value of all assets in an economy. This is like ignoring a company’s balance sheet, and judging it solely on the basis of its income statement.
The GDP ignores subsistence production.
These are just a few of many criticisms and limitations surrounding this measurement.
Here are a few examples:
A family decides to rely on growing their own fruits and vegetables to avoid pesticides and live a healthier life. This family is terrible because they just contributed to a decrease of the GDP because they stopped spending as much at the grocery store.
A set of parents just found out that their young child has a form of cancer. They fight with every paycheck and medical option alive to save their child. This family helps to increase the GDP. Good job.
Growing your own food is not a bad decision, and a parent finding out that their child will die before them is the definition of a worst nightmare.
How can we use a tool to measure the economy as being in a good or bad place, when that tool does not distinguish between the good and bad for us? If we want to change where we are going, we need to change our perspective, only then can be make a real difference.
So while news organizations publish stories with phrases like “the prospect of the world’s largest economy contracting is worrying” or “admitted disappointment in the lack economic growth”, I will sit back, enjoy a cup of tea, and be thankful for the health and happiness that I have today, while contributing little to nothing to the GDP, our flawed economy measure.