Gross Domestic Product

I was in the process of writing a post about science becoming an election issue, but have been somewhat distracted by an article in the Guardian by George Monbiot. The basic idea of the article is essentially that we are so fixated on growth that some people now believe that we should consider using all the resources on our planet if it allows us to then explore other worlds. What I found interesting was, however, the discussion of Gross Domestic Product (GDP), in particular the use of GDP growth as a measure of an economy’s success.

I’ve always had a bit of a problem with using GDP as a measure of a country’s wealth. Although I’m not an economist, it seems a little simplistic to just use this, especially since it gives no real indication of how the wealth is distributed. It is simply a measure of a country’s total economic output. I have argued before (here) that we should really use something like the Gini coefficient (indicating wealth distribution) and GDP, in order to optimise a country’s wealth together with how it is distributed. We could consider accepting a lower GDP if the wealth is more evenly distributed, especially since there doesn’t seem to be any strong evidence showing that giving excessive amounts of money to a select few ultimately benefits everyone.

What I found interesting in George Monbiot’s article was the suggestion – which came from a paper published by someone called Sir Parth Dasgupta – that another problem with GDP is that it doesn’t take into account the effect of GDP growth on a country’s resources. A country with a rapid growth in GDP could be doing this by depleting its resources in an unsustainable way so that even though GDP is growing, the total effective wealth is decreasing. Maybe we need to consider total wealth, GDP and how the wealth is distributed when trying to determine the strength of an economy. Maybe we also need to stop being so fixated on growth and start to consider how sustainable our economy’s are. As the current financial crisis has shown us, rapid growth is unsustainable and we would probably have been much better off if the financial sector had been more cautious and accepted a lower growth rate that would have been more sustainable (we probably can’t get rid of boom and bust completely, but we can probably minimise the amplitude of the perturbations).

Although I’m pleased to see more discussion about how a country’s economy is measured and would personally be very in favour of us considering how wealth is distributed and how sustainable our economy’s are when determining the wealth of a country, I’m not convinced that we are going to be seeing any paradigm shifting changes in the near future. It’s not really in the interests of today’s business leaders (who probably have a great deal of influence with our political leaders) to change the way in which we measure a country’s economic strength, especially if – in order to have an sustainable economy that would ultimately be of long-term benefit to the country, and possible even the world – this would involve them accepting a smaller fraction of the total wealth.

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5 thoughts on “Gross Domestic Product

  1. Pingback: Gross Domestic Product - Topic Research, Trends and Surveys

  2. GDP can be constricted by a ridiculous restriction on use of resources in the false assumption that preserving a certain type of resource is valuable. For example, what if we decided that we need to preserve oil reserves as a gift to our next millenium’s generation. Who will need oil in a thousand years? Alternative energy will reduce it to a useless resource. Why not utilize what we need while it is needed? We burned wood before we discovered coal. We used natural gas for street lamps until we had electricity. Now we want to preserve oil? Our GDP of the future will not be diminished by the use of our reserves today. Academics do not understand the dynamics of advances in technology changing the value of preserved resources. We are saving what will become worth less, and irrelevant.

    • I’ve got to admit that I don’t really understand the relevance of your comment. The main point of this post was largely that one has to be careful when measuring the wealth of a country and how this wealth is growing. The main point in the post was that one should include the value of resources (whatever these resources may be) in a calculation of a country’s wealth. The argument is not that resources should not be depleted, but that the depletion of these resources should be taken into account when determining the wealth of a country. I agree that other forms of energy could replace oil and that will change the value of resources, but I don’t think that changes the above argument much. Nothing will change for countries that simply need energy to run their economies, but those that rely on selling oil (for example), will lose the ability to generate wealth (unless they change their economy completely).

  3. Hobo ideas are fairly irrelavaent from the Depression to our current “jobless recovery” days. My point is the value of gross domestic product is not a zero sum game. Oil today is more than oil tomorrow. So the higher GDP with oil use increasing today, does not diminish or reduce the future growth. High timber use in the 17th century has not left us destitute and diminished today.
    Whether it is recognized or not, the railroad market crash by overbuilding of the late 1800’s, and the tech bubble of the late 20th century, and our real estate financing of every poor slob is a king of this Depression are signals of a major change in what is valued and why. That is my irrelavent point that the economic issues that created Word War II are now manifesting again but most want to focus on setting up fences and laws.

    • I’m still not quite sure what your argument is, but I do agree that in a global sense something will always replace resources, either when something cheaper and more efficient is discovered/invented or when resources start to become depleted and something else needs to be found to replace this resources. Globally, therefore, this shouldn’t have a big impact on global wealth. It could, however, have a massive impact on wealth locally. If a region of a country, or region of the world, relies very heavily on a particular resource that becomes depleted or is replaced by something new, that region will lose an awful lot of wealth (which will presumably go elsewhere). If we want to estimate the wealth of a particular region and how sustainable that wealth (and wealth growth) is, then taking into account the value of the resources (and how that value may change with time) seems to be a reasonable thing to do. Clearly not an exact science, but worth considering. If we are at all worried about future conflict then, again, having some sense of how the wealth of potentially volatile regions could be influenced by depletion of resources or the replacement of these resource with something new, could be crucial. Really, this post is just arguing that we should be aiming for sustainable growth not massive booms and busts which probably average to the same kind of growth over time, but the more sustainable the growth is, the less likely we are to undergo regular, rapid rapid changes in local wealth.

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