Evaluating the economy beyond GDP

Jack Barnett examines the limitations of GDP as an effective measurement of economic welfare.

Even before the coronavirus crisis, interest in using new, experimental statistics to better measure the health of the global economy was gathering momentum. This has in part been driven by efforts to challenge a decades-long attachment to one figure: gross domestic product (GDP).

GDP has often been criticised for not representing individuals’ welfare, failing to account for non-economic activity – such as housework, care and leisure pursuits – and fluctuating owing to statistical agencies routinely revising output figures as they receive new data.

GDP is also limited by providing only a snapshot of the aggregate value of goods and services produced by an economy over a particular period. As a result, it does not account for changes in the quality and range of goods and services over that same period. By focusing only on changes in price, GDP overstates the true inflation rate by ignoring improvements in efficiency.

For example, the price of goods and services, adjusted for inflation, may be similar in 2020 to the 1980s. However, the quality of goods and services available to consumers now compared to those available more than three decades ago is substantially higher, suggesting that living standards have improved, even if prices are similar.

Accelerating existing trends

Like so many other trends, the current pandemic is accelerating developments in using new statistical analyses to generate a more accurate picture of the global economy. For example, monitoring air traffic activity, live job postings and the frequency of terms searched for in search engines has helped produce real-time weekly output, activity and consumption estimates.

Use of new experimental statistical analyses has extended beyond economic circles. Excess deaths data has been argued to provide a more precise measurement of the impact coronavirus has had on mortality rates across the world.

There have been attempts at providing alternatives to GDP, such as the United Nations’ Human Development Index. By measuring additional data, including average life expectancy at birth and mean years spent in education, the index is designed to provide an indication of individuals’ well-being levels based on the extent of their access to opportunities that will improve their living standards in the long run. The index still utilises Gross National Income per capita (a form of GDP), but frames it alongside other statistics.

Achieving efficient outcomes

Despite its limitations, GDP growth is strongly correlated with improving living standards by expanding individuals’ access to goods and services. Employment and wages are likely to rise in a growing economy, which tends to increase income levels for those already employed and provide new income streams for people who were previously unemployed. This should support better access to basic necessities, such as food, water, shelter, health and education.

There are also strong links between how individuals behave relative to economic performance. Robust GDP growth typically results in households and firms forecasting that their short-term financial position is unlikely to worsen, which may improve consumer confidence levels and encourage spending, having the overall impact of stimulating economic growth. Equally, the opposite outcomes are likely to occur if GDP contracts.

However, GDP’s failure to capture additional social and economic considerations may incentivise firms, households and individuals to act irrationally because they do not have access to high-quality information to inform their decision-making. This can lead to the unintended result of pushing consumption and production in inefficient directions.

Conflicts between data and human experience

Constructing the post-Covid economy will be difficult. With unemployment likely to rise sharply as government support schemes are wound down, channelling investment into sustainable industries will be vital to stimulate job creation, maintain income levels and protect living standards. By extension, there has never been a more compelling case to rapidly pivot towards a green economy.

As the economy evolves, accelerating the development of new methods of measuring economic performance will be crucial to acquiring a more accurate picture of not just growth, but how the economy has recovered from the current crisis and its resiliency to new crises.

Ultimately, communicating individuals’ experiences of the world through a single number is extremely difficult as it will inevitably fail to capture the nuanced elements of their lives. However, it is important to remember that economic statistics are designed to do just that – aggregate indicators, not personalise experiences.

Jack Barnett is senior account executive at Instinctif Partners, an international business communications consultancy.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment