GDP or Gross Domestic Product is a figure that those of us who follow politics hear constantly. It is apparently the gold standard measure of health for our markets. Politicians tout it when it is high, blame others when it is low, and (ab)use it for politics.
As a nation we use GDP for almost everything economic. We even define a "recession" as two consecutive quarters of negative GDP.
The problem is that GDP is an increasingly inaccurate method to measure the economy. It is a metric that is overused and riddled with problems. It overlooks ecological damage, blows past non-economic services (that regardless are apart of the economy), and serves as the idol for which we kill the environment as a sacrificial bull in the hope that it stays in "the black".
Without an appropriate measure of society's wealth, our policymakers are going to be flying blind. In an era of statistics and econometrics we have to do better.
More below the fold.
It may be helpful to quickly review what exactly the GDP metric is, technically speaking. I am not an economist, but I borrowed the below diagram from someone who probably is.
GDP is supposedly a measure of economic activity in the nation. It is composed of "Consumption" (i.e. buying stuff), "Investment" (purchases that will lead to future yield. Think of a company building a new mine), "Government Spending" (pretty straightforward), and the difference between imports and exports.
GDP is said to "represent the total dollar value of all goods and services produced over a specific time period", and it does that job extremely well. What GDP does not do is represent the overall health of an economy, nor does it adequately factor in externalities.
GDP is also blind to the human condition. GDP does not understand human suffering, the mental anguish of unemployment, or the psychological distress of environmental destruction. It does not understand the need to provision for the future and provide for a world beyond the time in which it measures.
To play upon the ancient Dr. Seuss story of "The Lorax", let's pretend like the surrounding area of the Once-ler's factory is a country in which we are measuring GDP. GDP would not show any problems for this economy until the minute after the last Truffula Tree was chopped down. And by that point, it is too late.
None of this would be a problem if we used GDP the way it was suppose to be used. If we just took it as the measure of C + I + G + (x-m), we would be fine. The problem is that over time we have decided that GDP is an appropriate measure of the entire health of our economy. The entire health of our society, even. So we have a problem.
Quite frankly, I am not a fan of using any one measure as the "gold standard" test to quantify the economy. I think economies are just too darn complicated, and they include many factors that simply cannot be measured for. However, if we as a world require a measure of our economy, I would recommend finding a new one.
Some economists have proposed a "Green National Product" that includes the traditional elements of GDP, minus environmental damage. This would surely be an improvement. Better still is the "Genuine Progress Indicator" (the state of Maryland actually uses this) that measures environmental and social progresses along with economic ones.
Maybe part of the reason we see shortsighted -- and frankly, bad -- policy is because the statistics we use are equally shortsighted and...bad.