Rethinking “Gross Domestic Product”

VectorMine (n.d.). GDP vector illustration [illustration]. Shutterstock. https://www.shutterstock.com/es/search/gdp

What is the so-called “Gross Domestic Product (GDP)”, what is the problem with its current definition, and why should we care?

The GDP could be defined as the total value added of a given economy from all the final goods and services it has generated in a given year. It usually refers to a specific country but can also be applied to a region or more than just one country, e.g. the European Union. It is a measurement reference that aims to determine how much value added has generated an economy. Such a concept is widely used to measure economic and social parameters within such entities, including “progress”, “growth” and “welfare” among others.

In this scenario, the value added to an economy is the result of deducting the necessary cost of bought-in materials, components, and intermediate consumption from the final value of goods and services produced.

Under the traditional GDP definition, an item or service gains value added only when it is exchanged against money. However, a lot of things add value in our lives and yet are not paid. Does this mean that they should not be counted for the purpose of measuring the “progress”, “wealth”, or “welfare” of a country?

Objectively speaking, the affirmation “the more value added an economy has, the better is the economy” is true. However, if we take a closer look at the parameters considered to obtain the GDP numbers, one can spot, as we will see below, that relevant sectors that should be counted are left out and others should be re-interpreted.

In the GDP count, the expenditure on war and natural disasters is usually considered as added value, since the “recovery” after the events adds value to society, regardless of the number of losses and damages that have preceded them. In these cases, expenditures that are included may not strictly add value to an economy if we also include all the liabilities that have preceded them—loss of infrastructures, natural resources, homes, even lives. In fact, more likely than not, the losses could outgrow the benefits.

Also, some works such as housework, everyday domestic services, and personal care are not included in the equation for the GDP count. All volunteer services are excluded from the GDP definition, regardless of who benefits from the work—a family or an organization—but not all volunteer production of goods is excluded.

As Marilyn Waring—an economist, professor and former member of the New Zealand parliament—said in her TED Talk in August 2019 The unpaid work that GDP ignores and why it really counts:

—[...] So in the last week or so, how many of you have transported members of your household or their goods without payment? How many of you have done a bit of cleaning, a bit of vacuuming, a bit of sweeping, a bit of tidying up the kitchen? Yeah? How about going shopping for members of the household? Preparing food? Cleaning up afterwards? Laundry? Ironing?

(Laughter)

—Well, as far as economics is concerned, you were at leisure.

(Laughter)(Applause and cheers)

—Now, how about the women who have been pregnant and who have had children? Yes. Now, I really hate to tell you this, because it might well have been hard labor, but at that moment, you were unproductive. (Waring, 2019, minute 4:12 to 5:29).

GDP does not measure the social or environmental situation of an economy either. Taking natural resources, exploiting them, and obtaining economic compensation for it is considered growth. However, in the fictional accounting books of the natural resources, there is no compensation or value in protecting, sustaining, or regenerating it, because it is considered that there is no “growth” in it. Another way of framing it could be that the economic reward of taking and using natural resources is an individual achievement that adds to the GDP growth count but the liabilities and consequences of maintaining and taking care of such natural resources are someone else’s responsibility—a.k.a. public. And that does not sound representative of reality, balanced, or fair. At all.

Furthermore, the current GDP definition does not measure happiness or well-being of its population. All of us can think of the top two or three countries that have the highest GDP that also happen to have the highest rates of stress, mental health, social and poverty issues, to name a few.

As stated at the beginning of this article, all the above would be irrelevant if it was not for the fact that GDP is officially used as a reference to determine the level of progress and health of an economy—also affecting the sectors that are left out of the equation—as well as other aspects of our daily lives. An increase in the GDP of an economy does not necessarily imply that its population has an improved standard of living.

Ethical.net (n.d.) GDP Alternatives [illustration]. Ethical.net. https://ethical.net/politics/gdp-alternatives-7-ways-to-measure-countries-wealth/

Luckily, in recent years, a growing number of economists and policy makers have been challenging the current definition of GDP in order to make it more inclusive and representative of a given economy's reality.

By way of example, some initiatives like the following ones have been taken in this regard:

• The “Beyond GDP” lead by the Statistical Office of the European Communities (Eurostat). The initiative is about developing indicators that are as clear and appealing as GDP, but more inclusive of environmental and social aspects.

• The Human Development Index (HDI) created by the United Nations. The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.

• The “Better Life Index” led by the Organization for Economic Co-operation and Development (OECD). The first sentence on their webpage reads: “How’s life? There is more to life than the cold numbers of GDP and economic statistics – This Index allows you to compare well-being across countries, based on 11 topics the OECD has identified as essential, in the areas of material living conditions and quality of life”.

To wrap up and paraphrasing again Marilyn Waring:

—[...] And others have said to me, "Marilyn, why don't you just work on a system that includes all the unpaid work and the pregnancy and the birth and the lactation in the GDP?" There's a very important moral and ethical answer to that, and it is that I do not want the most valuable things on earth, the things I treasure, sitting in an accounting framework that thinks that war is great for growth. (Waring, 2019, minute 15:09).

I think we could all agree with her on that.

This discussion requires hours of research and debate, but the aim of the present article is to bring to the reader some food for thought and a first glance of a relevant topic that should be reconsidered and understood by all.

References:

Pilling, D. (2019). It's Time to Redefine GDP to Help Save the Planet. Time [Press release]. www.time.com/5735520/economic-growth-gdp/

Waring, M. (2019). The Unpaid Work that GDP Ignores and Why it Really Counts [video]. TEDx Christchurch. www.ted.com/talks/marilyn_waring_the_unpaid_work_that_gdp_ignores_and_why_it_really_counts

Waring, M. (2011). [her personal webpage]. https://www.marilynwaring.com/

Eurostat. (2019). Beginners: GDP - What is gross domestic product (GDP)? [article publication]. https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Beginners:GDP_-_What_is_gross_domestic_product_(GDP)?#What.E2.80.99s_covered_by_GDP.3F

Smith, J. (Last accessed, 18 Dec. 2021). Female economics still waiting to be counted [article publication]. https://reporter.anu.edu.au/female-economics-still-waiting-be-counted

United Nations. (Last accessed, 18 Dec. 2021). Human Development Index (HDI) [online publication]. Human Development Reports. http://hdr.undp.org/en/content/human-development-index-hdi

European Commission. (Last accessed, 18 Dec. 2021). Beyond GDP – Background [webpage]. Directorate-General for Environment. http://ec.europa.eu/environment/beyond_gdp/background_en.html

World Economic Forum. (2021). Can we go beyond GDP? Welcome to the Stakeholder Capitalism video-podcast series [online publication]. World Economic Forum. https://www.weforum.org/agenda/2021/12/stakeholder-capitalism-beyond-gdp-diane-coyle-girol-karacaoglu?utm_source=linkedin&utm_medium=social_video&utm_term=16_9&utm_content=SC_Ep_1_10_Min&utm_campaign=social_video_2021

Bennett Institute for Public Policy (2019). Beyond GDP – Cambridge research project explores new measures for the 21st century economy [online publication]. University of Cambridge. https://www.bennettinstitute.cam.ac.uk/news/beyond-gdp-cambridge-research-project-explores-new/

Reference Images:

VectorMine (n.d.). GDP vector illustration [illustration]. Shutterstock. https://www.shutterstock.com/es/search/gdp

Ethical.net (n.d.) GDP Alternatives [illustration]. Ethical.net. https://ethical.net/politics/gdp-alternatives-7-ways-to-measure-countries-wealth/