New Normal, New GDP?
Use of deficient GDP indicator for measuring economic progress is turning obsolete. A more holistic data-driven solution for gauging progress could be the answer.
The earliest inklings to the formation of an indicator by the name of ‘Gross Domestic Product’ or GDP, can be traced back to the mid-seventeenth century: devised as a basic concept to attack landlords engaging in unfair taxation regimes. Since then, the indicator has undergone several changes in its means of formulation until, in 1934, the modern definition of GDP was established by Nobel Prize-winning economist Simon Kuznets for a US Congress report. Soon thereafter, (post the famous Bretton Woods conference in 1944), GDP became the primary tool in measuring a country’s economy.
The Gross Domestic Product of a country today stands as the primary indicator of a country’s economic health: measuring the “total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period” (usually quarterly or annually). The narrative, however, is now changing. Is the GDP indeed (still) the best indicator of a country’s economic health?
Right at the time of formulation, it was noted that GDP was in no way a measure of the welfare of the people of a country. As a country’s primary economic measure, it is still rather esoteric and finite in scope. This has led several renowned economists of today to claim that GDP is, in fact, not an appropriate measure to analyse a country’s economic health.
Consider an example: The United States recorded a mind-blowing annualised GDP growth rate of almost 33.1% in the third quarter of 2020. This, to many, seemed more a farce than anything else, as the ground reality reflected a very different truth (not to say that the technical calculation of the metric was incorrect: it wasn’t). Harvard Business Review writes: “At a time of a massive public health crisis, long lines at food banks, record-breaking hurricanes, glaring racial disparities, and mounting feelings of stress and overwhelm, no one wants to hear about the historic triumph of an abstract number that’s supposed to tell us how well our society is doing.” This essentially raises a much more complex (and practical) question: How can a country’s primary economic indicator be so ill-representative of ground reality?
Not Just Academic Musing
Economists today are generally agreeing upon the notion of a new indicator of a country’s economic well-being: where the one-metric-fits-all approach of the GDP indicator will be replaced by a measure that stresses more on the economic well-being of the agents that make up the economy, instead. This is, of course, not just academic musing: it is crucial to set up a more holistic benchmark to analyse economic prosperity simply because governments are analysed by what is measured.
With regard to the previous example, a 33% annualised GDP would, in fact, point to brilliant economic performance through the pandemic by the Trump-led administration in the final quarter of 2020. How far from the truth this is, is of course one’s own cup of tea. HBR opines: “GDP doesn’t reflect whether an economic recovery is equitable. The growing divide of the pandemic — wherein the wealthiest individuals have seen unprecedented income gains and tens of millions of families have lost income — has had no discernible bearing on GDP numbers. Likewise, GDP hasn’t registered the widening gap between Black and white unemployment in recent months, or the ongoing devastation of the opioid epidemic. Other equity stressors — like climate impacts — may even be contributing to its rise. Financial analysts have estimated that, if anything, past hurricanes have caused a slight increase in GDP due to the activity associated with clean-up and rebuilding. A decade ago, the worst environmental disaster in U.S. history, Deepwater Horizon, registered as a plus for GDP for similar reasons, according to JP Morgan estimates.”
Gross Data Product?
Panellists at the World Economic Forum have however highlighted the difficulties attached with creating a new measure for economic prosperity. Developing a metric that will be comprehensible to the majority of the populace, that does not discount the use of current measures, such as GDP, whilst incorporating measures of subjective well-being is a rather difficult task. Several approaches have been proposed: such as in assigning value to household work, quality improvements in the measurement of healthcare and a measure to quantify ‘welfare’. All agree, however, that this is a rather tedious process – and will have to be carried out with regular periodicity, much like the GDP indicator, to maintain its relevance.
An interesting idea proposed by the Harvard Business Review, where the GDP indicator is subdivided into several categorical variables (akin to the unemployment metric released by the US Statistics Bureau) could prove to be useful. Currently, statistics for unemployment in the United States are reported through six measures, from ‘U1’ to ‘U6’, each representing a specific aspect of unemployment. Similar strategies are used to depict Consumer price indices and money supply as well, where the measures are a series of values, instead of just one integer value.
“While GDP, or G1, would be standard national income, G2 could give a fuller picture of income, revealing how equitably it is distributed while reflecting the contributions of unpaid labor, like care for children and elders. G3 might look to the future, ensuring that today’s output does not hamper tomorrow’s by exacerbating environmental/challenges or depleting resources. G4 could seek to account for our overall day-to-day well-being, including, for example, measures of health and social connection.”
These are, of course, all statistical attributes where AI and machine learning models will play a key role in development. A holistic ‘GDP’ indicator – ‘Gross Data product’ – backed by swathes of varied data may thus prove to be much more beneficial in determining the true economic progress of a nation, rather than simply stressing on accounting economic ‘growth’.
