[OPE-L] GDP and the "whole economy"

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Mon Oct 15 2007 - 13:51:32 EDT


There is a difference between items which are "conceptually" included in GDP or excluded from it, and items which are not included or excluded due to "technical measurement difficulties".

The items which you mention are conceptually included in GDP, though difficult to measure, and therefore maybe excluded. For example, in South Africa some efforts are being made to implement surveys that will pick up much more of the "informal economy". Likewise in e.g. Russia some attempts are being made to measure the "grey" economy. Obviously, if you can pick up more economic activity through additional surveys then your GDP measure will be larger, and then you can say, that your economy is doing better than was previously thought.

The argument I have previously made concerns only what is conceptually included and excluded from GDP. My analysis shows that one result of of neoliberal policy since 1980, is a massive growth of property income, but this income will never show up in GDP, precisely because it is conceptually excluded from GDP as it does not arise from production. 

One inference is that if real GDP growth is rather flat or stagnant, this does not necessarily mean that total income growth is stagnating. Property income may be booming, boosting final demand from the propertied class, but this is not directly acknowledged in GDP figures because they conceptually exclude much of it. It is just that if the propertied class has more money to spend, this will boost their final demand and therefore indirectly boost GDP.

Quite simply, GDP does not represent the "whole economy" because of what it was originally defined to mean: the gross new value added by production. 

If the expenditure on the product is equal to the value of the product, and to the incomes generated by the production of the product, that is true by definition, only because of the accounting operation applied. That accounting operation necessarily excludes a whole bunch of transactions.

Paul Samuelson, Nobel Laureate and author of many textbook references, once described GDP as "truly among the great inventions of the 20th century, a beacon that helps policymakers steer the economy toward key economic objectives". http://www.oecdobserver.org/news/fullstory.php/aid/1518/Is_GDP_a_satisfactory_measure_of_growth_.html

My criticism of Samuelson's judgement is not just that the real value relations are distorted by the concept, but also that our understanding of income distribution is distorted by this aggregate. In the future, this distortion will become even greater, e.g. because of the growth of property rents. Rental income is only partly reflected in GDP, and if more people rent rather than buy, this tends to lower GDP. And to the extent that socio-economic inequality strongly increases, more people wil rent rather than buy.

This being the case, I do not see why GDP will necessarily be "a beacon that helps policymakers steer the economy toward key economic objectives". In my experience, almost no policy-maker (or for that matter economics graduates) understands what GDP means - all they have is a vague idea that GDP means the "whole economy", which as I argue is false. 

The GDP indicator is widely used in the financial markets for purposes which to a professional economic statistician are not valid. Not just because the measurements are typically revised after the first publication, but because of what it means.


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