What are we trying to measure?

There was a lovely article on the news recently which said that the Italians were now including sex and drugs in their GDP figures.  I am afraid the only reference I can find at present is to an article in Bloomberg of 21 May.  But the point seems to be confirmed.  And indeed the UK GDP figures may also need to include whatever we can measure of prostitution and illegal drug sales.

This has made me wonder why this is something we are so keen to measure and get so excited about (when it goes up) or depressed with (when it goes down).  And why do we compare GDP and borrowing so much as a way of seeing if the borrowings are affordable.

What is GDP

What is GDP (Gross Domestic Product)?  There are a couple of answers from the BBC archives – Declan Curry explained it in 2011 and Peter Day says something about it when reviewing a new book in 2014.

As an accountant, it seems to be a strange measure.  If we are preparing accounts for a group of companies, we may well start by adding up the numbers for all the companies in the group, but we then (try to) exclude intercompany trading.  So we would exclude all the sales of a manufacturing company to a company in the same group (as the ultimate sales outside the group will be recorded by this second company).

GDP just adds everything up and says “this is the sum total of what the country has produced.”  But countries are not “producers” like companies are.

So is this really a good measure?  If harvests are bad, farmers have to work harder but their contribution to GDP will be lower (because they have less to sell).  Equally if we have a disaster, GDP may well be higher as lots of people spend more money recovering from the disaster. Of course, in the long run it all evens out, but (as Maynard Keynes the famous economist said ) “in the long run we are all dead,” and we do need to know about this year and next if economics is going to be any use to us.

What use is GDP?

As a measure, GDP has been useful. If it goes up, generally speaking everyone in the country is better off.  But the GDP does not measure differences between richer and poorer.  If GDP goes down, we are all worse off – but some may suffer more than others.

We can put GDP into league tables and see how well our country is doing (or not) compared to others.  But again this is a rough guide and may not reflect special circumstances (such as who is hosting a big football tournament).

What should we measure?

So are there better things to measure?

  • Should we follow Bhutan and measure happiness?
  • Or perhaps we should care more about the balance of payments – how much we are importing or exporting – a measure which seems to get little press these days perhaps because it has been in deficit since 1984.
  • Or should we be concentrating on social measures – child poverty?
  • or natural resources such as oil reserves (with and without shale deposits).
  • Or should we measure R&D spend and whether it is by a UK company (such as AstraZeneca) or owned outside the UK (like Pfizer).

One thing we will not care about is fiscal deficits if my suggestion of outlawing commercial debt is followed through.  Why?  Because the government (along with everyone else) would not be allowed to borrow – so it would not be allowed to spend more money than it gets in.  Therefore we would not care about government debt at all (because there will be none).

Similarly interest rates would be a thing of the past (as interest is the reward or penalty for commercial debt).

So what measures would we care about?  What will we demand our politicians do something about?  Full employmentEducation outcomesForeign aid? Euro or dollar exchange rate?

An idea

I would suggest that the only money measure we might be interested in will be Inflation – or Ed Millband’s preferred measure of the cost of living.  Everything else we care about is not directly related to money values.

What do you think?

 

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