How Relevant are The 20th Century's GDP Calculations in The 21st Century?

Posted in Lending Articles By Bajaj Markets-
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Gross Domestic Product or GDP is not just a statistical indicator but a barometer of progress and wellbeing across the world. Be it states, countries or continents, the first port of call to measure financial wellbeing is often the GDP numbers and a quick comparison leads us to make conclusions about who’s doing well and who’s not. For instance, India’s march to superpower status is considered legitimate because of its consistently high GDP growth.

Even as the GDP figures have fallen below 5% in recent quarters, the country is still considered an oasis of growth in a slowing world economy where countries are finding it hard to manage even a 2-3% growth rate. But, how accurate is GDP?

Since its inception in the 20th century when GDP was first invented as an account to measure a country’s resources and capabilities during the World War periods, it has become the standard measure across the world that governments are trying to maximize by optimizing production, capital and labour. However, the calculation of GDP has barely changed in theory over the last century or so.

For instance, GDP has always remained an account of a country’s total resources and it can be measured either by total spending, total production or total income earned in the country. All these three methods are ideally supposed to give very similar numbers – a gross domestic product. However, a GDP number in isolation is pretty much useless. It gets insightful when it is compared over time or compared over different geographies. Knowing that India’s GDP is Rs 2.6 lakh crore doesn’t tell us much but knowing that it’s growing at a rate of 7% year-on-year tells us the pace of growth in the economy.

Similarly, GDP comparisons across countries can reveal that while India is growing at 7% every year, China is slowing to 4-5% growth which means that now India is growing faster than China. However, does it mean that India is now a better economy than China? Unlikely so.

And that’s where GDP’s flaws come to light. As an indicator, it is only the measure of total production or total income in the economy but it says nothing about the wellbeing of the people, ease of doing business, health and human development or even the social security a country provides to its citizens.

In a well-known example, an economist once wrote that GDP goes up when wars happen (production increases), drug sales rise (rise in income levels) and divorces happen (decoupling of partner incomes) but will that be a good country to live in? Unlikely.

Hence, the opposition to the idea of GDP was born and its now gaining momentum. While many argue that the measure is outdated simply because of its inception age and its lack of updates over time, another thing to consider is that GDP simply doesn’t measure what could be the more accurate measure of wellbeing for citizens or businesses.

For instance, knowing a country has a large GDP is not enough if we don’t know whether the country’s citizens are able to afford its goods and services. iPhones may cost the same around the world in monetary terms but an Indian citizen will have to work much longer to afford the device as compared to someone in the UK or Singapore and GDP isn’t able to provide for that fact. However, simply looking at the GDP growth, one might even conclude that India is a better and bigger economy than UK or Singapore but for the residents or businesses of the country, that number means little.

Another big opposition to GDP comes from what it can’t measure. Hence, anything that is non-monetary in nature will stay out of the GDP. So, things and experiences that give people pleasure but not necessarily cost money will remain out of the purview of this indicator. Reading or writing poetry, listening to songs, participating in community service, offering advice to those in need on a public forum etc will never be counted as part of the GDP no matter how big a role they are playing in improving the living standards as well as the state of the economy.

Hence, it can be concluded that while GDP has its limitations, it remains an important and perhaps the only-widely accepted measure of economic growth across the world – for now. While new models may evolve in the future to evaluate national happiness, well being and satisfaction, GDP isn’t going to become a relic anytime soon. And so far, it appears that India is winning that race.

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