GDP?

I've always been bemused that GDP growth is the standard metric for economic strength and standard of living. I think GDP growth is a very weak metric. My reasoning is that GDP measures the strength of the economy in dollar value. What GDP ignores is that, as a result of momentous technological progress, what we get for a dollar is growing much more rapidly than GDP. For example, if you purchased a computer ten years ago, and then a computer today for the same dollar value, what you get for your money today is orders of magnitude more than what you would have got back then. My smartphone is infinitely more powerful than my first PC. So in my mind, metrics for valuing technological development are far more critical than metrics measuring production by dollar value. Governments seem to completely ignore this. They become very concerned when GDP growth isn't up to par, whether it's 0.1% higher or lower than anticipated, while ignoring the fact that nonetheless technology is exponentially powering ahead as strongly as ever before. As a result, many consumer goods are developing very rapidly, as is our (technological) standard of living. I'd like to see more widespread use of technological development metrics when evaluating the strength of the economy. No single metric can fully characterise an economy or its people's standard of living. We need to employ a greater diversity of metrics to fairly reflect this and technology should be at the forefront.

7 thoughts on “GDP?”

  1. Government economists are not quite as dumb as you seem to think they are.

    The relevant measure is the “inflation-adjusted” or “real” GDP growth. The adjustment for inflation takes into account both the fact that — in some cases — your dollar buys you less than it used to and that — in other cases (like the ones you cite) — it buys you more than it used to.

  2. Even better, of course, is “real GDP growth per capita”, which accounts for the fact that real GDP goes up, whenever population grows, without the average individual being better-off.

  3. I’m not suggesting they’re dumb, just that always touting a single metric is misleading. As I said, I don’t believe that any single metric is sufficient to characterise the economy. Every sector of the economy is different and can be characterised in different ways. Certainly it’s reasonable to suggest that metrics for evaluating technology are different to those for characterising the amount of coal that’s produced.

  4. The cynical answer is that GDP is what matters when it comes to tax revenues, and therefore when it comes to buying off the electorate.

    More seriously though, GDP growth comes either from demographics, productivity, or both. Since improved technology supposedly increases productivity (just think of all those employees who are now able to check facebook 24/7), this finds its way into GDP through the usual channels. Firms that are more productive boost their bottom lines, then either invest in capital items, or pay their employees more thus boosting consumption and so on.

  5. Hi Chris,

    I largely agree with what you’re saying. If more processing power enters the market, then it should increase productivity and the GDP measures. However this isn’t always the case. Specifically consider consumer electronics like LCDs, gaming consoles, audio systems, PCs etc. This technology doesn’t increase GDP directly since it’s not involved in the productive process in any way. Nonetheless it improves our standard of living. So a pure GDP metric ignores this.

  6. This technology doesn’t increase GDP directly since it’s not involved in the productive process in any way. Nonetheless it improves our standard of living. So a pure GDP metric ignores this.

    Real GDP growth doesn’t ignore it.

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