gdp
Why did the size of the U.S. economy increase by 3 percent on one day in mid-2013 - or Ghana’s balloon by 60 percent overnight in 2010? Why did the U.K. financial industry show its fastest expansion ever at the end of 2008 - just as the world’s financial system went into meltdown? And why was Greece’s chief statistician charged with treason in 2013 for apparently doing nothing more than trying to accurately report the size of his country’s economy? The answers to all these questions lie in the way we define and measure national economies around the world: Gross Domestic Product. This entertaining and informative book tells the story of GDP, making sense of a statistic that appears constantly in the news, business, and politics, and that seems to rule our lives–but that hardly anyone actually understands.
Diane Coyle traces the history of this artificial, abstract, complex, but exceedingly important statistic from its eighteenth- and nineteenth-century precursors through its invention in the 1940s and its postwar golden age, and then through the Great Crash up to today. The reader learns why this standard measure of the size of a country’s economy was invented, how it has changed over the decades, and what its strengths and weaknesses are. The book explains why even small changes in GDP can decide elections, influence major political decisions, and determine whether countries can keep borrowing or be thrown into recession. The book ends by making the case that GDP was a good measure for the twentieth century but is increasingly inappropriate for a twenty-first-century economy driven by innovation, services, and intangible goods.
GDP: A Brief but Affectionate History, by Diane Coyle, Princeton University Press, RRP$19.95/£13.95 What does an economist do? Ask this question in a normal gathering and one of the least offensive responses is that they obsess over gross domestic product. Yet the mere mention of GDP is enough to stir up a hornet’s nest of misunderstandings. To some it is a supreme goal of national policy; to others an obsession of a degenerate culture. In fact it is neither. The first essential is to demystify GDP. Think of an island with no foreign trade. Its inhabitants will still produce something, which can be valued. The things they produce will be bought by other inhabitants, which in turn will generate incomes that will be spent. Thus output generates income which in turn generates expenditure. This is a three-way process that you can enter through any doorway you like, none of which is more fundamental than others. This is all that GDP is. It is obviously a rough-and-ready way to assess the potential wellbeing of a society. But it is not much use without a price index. If GDP doubles because of inflation this is no gain at all and some would regard it as net loss because the advantages of a stable price level have been thrown away. That is why more sensible economists prefer to talk about “real GDP”, thus scaring away the potentially interested onlooker even more. But this is the beginning of the qualifications. To have much meaning we have to talk about “real GDP per head”. Then we must allow for hours of work. If working hours were doubled by the decree of a dictator, real GDP per head would rise, although probably by not nearly as much as 100 per cent. So ideally, one would need a measure of GDP per hour, which is more difficult to obtain. Business books of the decade The Business Book of the Year Award has selected 152 books for its longlists since 2005. Together the longlisted books constitute a reader’s guide to a turbulent decade for business, media and publishing, with the financial crisis at its centre This is probably as far as one can go without entering into polemics and disputable value judgments. Around 1950, real GDP per head was much higher in North America than in western Europe and much higher in western Europe than in the Soviet Union. Whatever one thought of how western governments or their citizens chose to spend their incomes, a rational student would be bound to conclude that in terms of potential welfare, America would rank as number one, western Europe number two and the Soviet Union as number three, although not in strict proportion to their GDP per hour. Other things being equal, a higher real GDP per head is better than a lower one. That is the element of sense behind the “growthmanship” debates of the second half of the 20th century. But it is here, too, that the suspicions of ordinary people come into their own. A faster growth rate can be achieved at too high a price. A modest increase in the growth of real GDP achieved by concreting over rural England and destroying the cathedral cities may well be not worth having. And the richer the country, the more important the reservations. But for countries on starvation levels, it would be an affront to hold back potential improvements in living standards out of concern by westerners for their cultural heritage, probably misunderstood anyway. Diane Coyle’s book is as good a simple guide as we are likely to see. It unites the conceptual and the arithmetical explanations, with a good deal of history thrown in. She pays well-deserved tribute to early 18th-century writers such as Gregory King, and explains without exaggerating innovations in measurement (such as the inclusion of services that were earlier regarded as irrelevant fripperies) My one quibble is that Coyle does not say enough about GDP as a point of perspective for other things. We may know that Illyria spends a particular sum on military matters. Is this a lot or a little? As a first approximation, state the sum as a proportion of GDP. Then we can start a discussion. The main problem with GDP is that it adds an unnecessary air of mystification to what are ultimately pretty basic matters. When I was at university even the most learned economists spoke just of national income. GDP is simply gross national income without deducting depreciation, which came to be regarded as too difficult to measure on a national scale. It would probably aid understanding if discussion switched back to the national income concept, leaving GDP for the more technical footnotes. After all qualifications, it is better to be rich than to be poor. This applies at a national as well as a personal level. There is also a qualification to be made about the less immaterial forms of growth. We cannot go on producing more and more “stuff” until there is standing room only on the planet. But if I recite poetry to you and you play the harp to me, the performances could in principle continue to improve without any threat to the environment, the planet or any higher good. The cult of GDP has given economic growth a bad name.
In the good old days before Brexit and the global financial crisis, politics was all so simple. The western liberal democracies had reached the “End of History”. So far as old conundrums such as ideology and identity were concerned, nobody really cared much any more. All that mattered now was to ramp up material prosperity. “It’s the economy, stupid”, as Bill Clinton apocryphally said. It all sounds rather naive now, of course. Two and a half decades on from President Clinton’s bons mots, the world’s developed economies are wealthier than ever — indeed, more than 70 per cent larger in real terms than they were in 1992. Yet far from having achieved a nirvana of political stability, they are racked by a social strife and ideological conflict unseen in many decades. Where did Clinton’s confident verdict go wrong? It is the Ur-question of our era, and the political convulsions of the past decade have ushered in a golden age of popular social and economic analysis intended to explain why an expanding economy is not by itself enough. The Growth Delusion, a new book by the FT’s Africa editor David Pilling, goes straight to the heart of the matter. For Pilling’s subject is not growth, but gross domestic product itself: the fundamental macroeconomic concept that he correctly identifies as dominating most modern discussion of national economic well-being. That special status is, as he explains, unmerited. Like the proverbial sausage, most people’s enthusiasm for GDP as a summary measure of a nation’s prosperity quickly evaporates once they see what it is actually made of. With the eye of a seasoned journalist, Pilling colourfully captures why it is that GDP is such a quirky — some might say downright misleading — statistic. The official protocols define the scope of GDP as measuring all monetised activity between willing parties in a given period. It is a pragmatic definition, but leads to some counterintuitive results. The sale of stolen goods for cash contributes positively to GDP, for example — so theft is good for growth. A parent’s housework and childcare, however, being unpaid, are excluded — resulting, by one recent evaluation, in a $3.8 trillion underestimate of the size of the US economy. Recommended Time to change the way we measure the wealth The quest for better ways to measure economic development The economist’s guide to the future Then there are the thorny questions of how to measure the value added of finance and the public sector. The only — unsatisfactory — solution yet found is to reverse-engineer the answer from costs. Throw in the vagaries of price index construction, quality adjustments and purchasing power parity, and the net result of such conceptual shortcomings is that within an alarmingly wide margin of error, GDP is simply not a very good indication of how well-off a country is. Much of this will probably be familiar territory to many FT readers — and were The Growth Delusion nothing more than a stylish tour of the inadequacies of GDP, it would be a lesser book. At its core, however, is a much more interesting insight — one that raises it above the usual tirades against lies, damned lies, and statistics. While the sale of stolen goods contributes to GDP, housework and childcare — being unpaid — are excluded This is that all concepts used in economic measurement are creatures of particular policy objectives, devised with specific uses in mind. As The Growth Delusion explains, GDP is the locus classicus of this principle. The concept was developed by the Russian-American economist Simon Kuznets in order to justify the unprecedented fiscal activism of the US’s New Deal in the 1930s. It was refined and developed by two British scholars, Richard Stone and James Meade, in order to optimise the wartime exploitation of resources in the UK. GDP was tailored to facilitate fiscal policy, in other words — not to summarise national well-being or to benchmark industrial sophistication. This realisation that GDP is properly adapted to a rather limited range of purposes should, however, come as a liberation, not a disappointment. In the final section of The Growth Delusion, Pilling gives a flavour of modern attempts to formulate public policy goals beyond the growth of GDP and construct the new statistics needed to motivate and monitor their implementation. Some of these are by now tried and tested — for example, the Human Development Index (HDI) devised by Pakistani economist Mahbub ul Haq in 1990, and widely used in international development since then. Others, such as the measures of happiness promoted by Richard Layard of the London School of Economics, have yet to break into the mainstream — though the case for them to do so is strong. The HDI and happiness indices do at least aim to measure the well-being of the population. GDP, by contrast, is an intrinsically unreliable guide. My favourite piece of evidence is supplied by Pilling not in this book, but in his previous one, Bending Adversity (2014). Accompanying a visiting western leader on a tour of Tokyo deep into its two lost decades of growth, the two men find themselves boggling at the city’s gleaming, futuristic skyline late one night. “If this is a recession,” the politician groans, “I want one.” The Growth Delusion: Wealth, Poverty and the Well-Being of Nations, by David Pilling, Bloomsbury RRP£20/Tim Duggan Books RRP$26, 352 pages Felix Martin is author of ‘Money: The Unauthorised Biography’ (Bodley Head)
Diane Coyle traces the history of this artificial, abstract, complex, but exceedingly important statistic from its eighteenth- and nineteenth-century precursors through its invention in the 1940s and its postwar golden age, and then through the Great Crash up to today. The reader learns why this standard measure of the size of a country’s economy was invented, how it has changed over the decades, and what its strengths and weaknesses are. The book explains why even small changes in GDP can decide elections, influence major political decisions, and determine whether countries can keep borrowing or be thrown into recession. The book ends by making the case that GDP was a good measure for the twentieth century but is increasingly inappropriate for a twenty-first-century economy driven by innovation, services, and intangible goods.
GDP: A Brief but Affectionate History, by Diane Coyle, Princeton University Press, RRP$19.95/£13.95 What does an economist do? Ask this question in a normal gathering and one of the least offensive responses is that they obsess over gross domestic product. Yet the mere mention of GDP is enough to stir up a hornet’s nest of misunderstandings. To some it is a supreme goal of national policy; to others an obsession of a degenerate culture. In fact it is neither. The first essential is to demystify GDP. Think of an island with no foreign trade. Its inhabitants will still produce something, which can be valued. The things they produce will be bought by other inhabitants, which in turn will generate incomes that will be spent. Thus output generates income which in turn generates expenditure. This is a three-way process that you can enter through any doorway you like, none of which is more fundamental than others. This is all that GDP is. It is obviously a rough-and-ready way to assess the potential wellbeing of a society. But it is not much use without a price index. If GDP doubles because of inflation this is no gain at all and some would regard it as net loss because the advantages of a stable price level have been thrown away. That is why more sensible economists prefer to talk about “real GDP”, thus scaring away the potentially interested onlooker even more. But this is the beginning of the qualifications. To have much meaning we have to talk about “real GDP per head”. Then we must allow for hours of work. If working hours were doubled by the decree of a dictator, real GDP per head would rise, although probably by not nearly as much as 100 per cent. So ideally, one would need a measure of GDP per hour, which is more difficult to obtain. Business books of the decade The Business Book of the Year Award has selected 152 books for its longlists since 2005. Together the longlisted books constitute a reader’s guide to a turbulent decade for business, media and publishing, with the financial crisis at its centre This is probably as far as one can go without entering into polemics and disputable value judgments. Around 1950, real GDP per head was much higher in North America than in western Europe and much higher in western Europe than in the Soviet Union. Whatever one thought of how western governments or their citizens chose to spend their incomes, a rational student would be bound to conclude that in terms of potential welfare, America would rank as number one, western Europe number two and the Soviet Union as number three, although not in strict proportion to their GDP per hour. Other things being equal, a higher real GDP per head is better than a lower one. That is the element of sense behind the “growthmanship” debates of the second half of the 20th century. But it is here, too, that the suspicions of ordinary people come into their own. A faster growth rate can be achieved at too high a price. A modest increase in the growth of real GDP achieved by concreting over rural England and destroying the cathedral cities may well be not worth having. And the richer the country, the more important the reservations. But for countries on starvation levels, it would be an affront to hold back potential improvements in living standards out of concern by westerners for their cultural heritage, probably misunderstood anyway. Diane Coyle’s book is as good a simple guide as we are likely to see. It unites the conceptual and the arithmetical explanations, with a good deal of history thrown in. She pays well-deserved tribute to early 18th-century writers such as Gregory King, and explains without exaggerating innovations in measurement (such as the inclusion of services that were earlier regarded as irrelevant fripperies) My one quibble is that Coyle does not say enough about GDP as a point of perspective for other things. We may know that Illyria spends a particular sum on military matters. Is this a lot or a little? As a first approximation, state the sum as a proportion of GDP. Then we can start a discussion. The main problem with GDP is that it adds an unnecessary air of mystification to what are ultimately pretty basic matters. When I was at university even the most learned economists spoke just of national income. GDP is simply gross national income without deducting depreciation, which came to be regarded as too difficult to measure on a national scale. It would probably aid understanding if discussion switched back to the national income concept, leaving GDP for the more technical footnotes. After all qualifications, it is better to be rich than to be poor. This applies at a national as well as a personal level. There is also a qualification to be made about the less immaterial forms of growth. We cannot go on producing more and more “stuff” until there is standing room only on the planet. But if I recite poetry to you and you play the harp to me, the performances could in principle continue to improve without any threat to the environment, the planet or any higher good. The cult of GDP has given economic growth a bad name.
David Pilling
In the good old days before Brexit and the global financial crisis, politics was all so simple. The western liberal democracies had reached the “End of History”. So far as old conundrums such as ideology and identity were concerned, nobody really cared much any more. All that mattered now was to ramp up material prosperity. “It’s the economy, stupid”, as Bill Clinton apocryphally said. It all sounds rather naive now, of course. Two and a half decades on from President Clinton’s bons mots, the world’s developed economies are wealthier than ever — indeed, more than 70 per cent larger in real terms than they were in 1992. Yet far from having achieved a nirvana of political stability, they are racked by a social strife and ideological conflict unseen in many decades. Where did Clinton’s confident verdict go wrong? It is the Ur-question of our era, and the political convulsions of the past decade have ushered in a golden age of popular social and economic analysis intended to explain why an expanding economy is not by itself enough. The Growth Delusion, a new book by the FT’s Africa editor David Pilling, goes straight to the heart of the matter. For Pilling’s subject is not growth, but gross domestic product itself: the fundamental macroeconomic concept that he correctly identifies as dominating most modern discussion of national economic well-being. That special status is, as he explains, unmerited. Like the proverbial sausage, most people’s enthusiasm for GDP as a summary measure of a nation’s prosperity quickly evaporates once they see what it is actually made of. With the eye of a seasoned journalist, Pilling colourfully captures why it is that GDP is such a quirky — some might say downright misleading — statistic. The official protocols define the scope of GDP as measuring all monetised activity between willing parties in a given period. It is a pragmatic definition, but leads to some counterintuitive results. The sale of stolen goods for cash contributes positively to GDP, for example — so theft is good for growth. A parent’s housework and childcare, however, being unpaid, are excluded — resulting, by one recent evaluation, in a $3.8 trillion underestimate of the size of the US economy. Recommended Time to change the way we measure the wealth The quest for better ways to measure economic development The economist’s guide to the future Then there are the thorny questions of how to measure the value added of finance and the public sector. The only — unsatisfactory — solution yet found is to reverse-engineer the answer from costs. Throw in the vagaries of price index construction, quality adjustments and purchasing power parity, and the net result of such conceptual shortcomings is that within an alarmingly wide margin of error, GDP is simply not a very good indication of how well-off a country is. Much of this will probably be familiar territory to many FT readers — and were The Growth Delusion nothing more than a stylish tour of the inadequacies of GDP, it would be a lesser book. At its core, however, is a much more interesting insight — one that raises it above the usual tirades against lies, damned lies, and statistics. While the sale of stolen goods contributes to GDP, housework and childcare — being unpaid — are excluded This is that all concepts used in economic measurement are creatures of particular policy objectives, devised with specific uses in mind. As The Growth Delusion explains, GDP is the locus classicus of this principle. The concept was developed by the Russian-American economist Simon Kuznets in order to justify the unprecedented fiscal activism of the US’s New Deal in the 1930s. It was refined and developed by two British scholars, Richard Stone and James Meade, in order to optimise the wartime exploitation of resources in the UK. GDP was tailored to facilitate fiscal policy, in other words — not to summarise national well-being or to benchmark industrial sophistication. This realisation that GDP is properly adapted to a rather limited range of purposes should, however, come as a liberation, not a disappointment. In the final section of The Growth Delusion, Pilling gives a flavour of modern attempts to formulate public policy goals beyond the growth of GDP and construct the new statistics needed to motivate and monitor their implementation. Some of these are by now tried and tested — for example, the Human Development Index (HDI) devised by Pakistani economist Mahbub ul Haq in 1990, and widely used in international development since then. Others, such as the measures of happiness promoted by Richard Layard of the London School of Economics, have yet to break into the mainstream — though the case for them to do so is strong. The HDI and happiness indices do at least aim to measure the well-being of the population. GDP, by contrast, is an intrinsically unreliable guide. My favourite piece of evidence is supplied by Pilling not in this book, but in his previous one, Bending Adversity (2014). Accompanying a visiting western leader on a tour of Tokyo deep into its two lost decades of growth, the two men find themselves boggling at the city’s gleaming, futuristic skyline late one night. “If this is a recession,” the politician groans, “I want one.” The Growth Delusion: Wealth, Poverty and the Well-Being of Nations, by David Pilling, Bloomsbury RRP£20/Tim Duggan Books RRP$26, 352 pages Felix Martin is author of ‘Money: The Unauthorised Biography’ (Bodley Head)
Comments
Post a Comment