A Debate on GDP, Wealth and Economy

By Senthil Ratnasabapathy

The discussion is on, again. It is all about whether or not the Gross Domestic Product (GDP) correctly reflects the status of the economy and wealth of a country.

The latest discussion began after some European countries, following a directive by the European Union, started counting revenues through sex trade, drugs and contraband items such as tobacco.

The EU wants to gain insight into the role such illicit businesses play in national and regional economies but it has naturally let loose the current discussion. After all, one does wonder how gambling, of all things, contributes to the economic growth, or to the welfare, of a country.

As indicated above, this is not the first time doubts have been raised about the efficacy of GDP in measuring a country’s true economic wealth.

World GDP

World GDP. Source: World Bank

 

GDP’s Detractors

In fact, the efficacy of GDP had been challenged by none other than economist Simon Kuznets, who is the father of the GDP system – he came up with it in the thirties for the US government.

One of the fundamental weaknesses of GDP is that it just measures national economic activity. That is, everything produced within a country.

But in a globalized economy, where people move around and send money home, and foreign companies invest and take part of, if not all, the profit back to home territory, this system does not work well.

For example, hundreds of thousands of Canadians send money abroad and this will not be taken into account when Canada calculates its GDP. Similarly, the profits repatriated by Canadian companies from their offshore operations will also not be counted.

Then there are other factors: for decades many have argued that the GDP does not calculate the true value of production within a country. Let’s take the example of cutting down a tree and carving a table out of it. Costs such as the purchase price and the processing costs – labour, fuel etc., – are taken into consideration, but what about the environmental cost when the tree is cut? What about the environmental cost of the fuel that is used to transport the tree and then the finished product to the market or the buyer?

Similarly, one long standing complaint of equal rights advocates, or even pure economists, is that the cost of housework is not really counted into the economic activity of a country.

Perhaps another unit that might be more useful, but is not generally used, is the Gross National Product (GNP) which calculates the GDP but discounts the remittances while adding the inflow of cash.

Alternative Units for GDP

Detractors have put forward other units that can measure the wealth of a nation better, such as the Human Development Index (HDI), developed by the United Nations Development Program (UNDP), or the Better Life Index of the Organization of Economic Development and Cooperation (OECD). Both seek to be holistic, taking into consideration gender, religious and racial equality, opportunities available for the different sectors society, the state of infrastructure, health and education, etc.

But they are not complete either. The challenge is to figure out a clear definition for the wealth of a nation, and then go about finding a system to measure it.

 

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