Most economics courses will include the topic of limitations of Gross Domestic Product as an indicator of standard of living. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile. Increasing GDP has been the indicator of a healthy economy but is it time for degrowth? This CNBC video looks at whether degrowth is the way forward and should we priorities social and ecological well-being? Scotland, Iceland and New Zealand have focused on well-being rather than economic growth. New Zealand’s recent ‘well-being’ budget indicated this. Good video for the future direction of macro policies and where we are going as a society.
A book published this year ‘Fully Grown: Why a Stagnant Economy Is a Sign of Success’ Dietrich Vollrath addresses the issue – is growth the best way to measure economic success — and does a slowdown indicate problems in an economy?
He discusses that the slowdown (Pre-Covid) is an indicator of economic prosperity. The economy has already provided much of what we need in life – comfort, security and luxury – that we have turned to new forms of production and consumption that enhance our well-being but do not contribute to growth in GDP. One chapter looks at the increase in imports from China and how it doesn’t necessarily have any connection with the level of GDP or growth rate. It is commonly portrayed in the media that imports from China have a negative effect on US GDP and you can say that they do impact on employment levels in certain sectors – e.g. manufacturing industry. This can lead to a slowdown in growth if workers didn’t find alternative employment. According to Vollrath the size of imports from China looks too small to account for the growth slowdown.
There is an assumption that imports lower GDP but most introductory economics courses refer to GDP with the following:
Y = C + I + G + (X-M)
Y = GDP, C = Consumption, I = Investment, G = Government spending, (X-M) = Exports – Imports
With this equation if imports are higher, it must be that GDP is lower. The right hand side of the equation is just a way of accounting for GDP; it does not determine the size of GDP. Vollrath now puts imports on the other side of the equation so you have:
Y + M = C + I + G + X
The above equation helps given the common way that people understand the relationship if they imagine that M goes up, they’ll jump to the conclusion that one of the items on the right (C + I + G + X) must have gone up as well.
Y + M is the total goods and services available in a given year which we can purchase. The other side of the equation represents the purchasing of these goods and services whether it is consumption goods, capital good, government purchases and foreign purchases. An increase in imports means that there are more goods and services to purchase. But there is no necessary mechanical effect of having more imports on the size of our own production, GDP.
Statistics New Zealand produced a great interactive graphic showing which industries have contributed to New Zealand’s GDP. It takes the top 10 industries that contributed most to the production measure of gross domestic product (GDP) in a given year. Industries are coloured based on four broad industry groups:
- Goods-producing industries: manufacturing; electricity, gas, water, and waste services; and construction industries.
- Primary industries: agriculture, forestry, fishing, and mining industries.
- Service industries: wholesale trade; accommodation and food services; retail trade; transport, postal, and warehousing; information, media, and telecommunications; finance and insurance services; rental, hiring, and real estate services; professional, scientific, technical, and admin support services; government administration; health; education; and other service industries.
- Taxes on production: includes GST, import duties, and stamp duties.
Below the doughnuts show the changes from 1973 to 2018.
Things to note:
- The contribution from the goods sector has fallen from 33% to 19%
- The service sector has increased from 51% to 65% over the period
- The primary sector has halved over the period from 14% to 7% – agriculture was the biggest industry in 1972 at 11.2 but by 2018 this figure was 4.3% and the industry was relegated to10th in 2018
Click here to go the interactive – well worth a look and great for Macro at NCEA Level 2 and 3.
Here is another very useful video from CNBC which focuses on what actually is a recession. By definition it is two consecutive quarters of negative GDP. Between 1960 and 2007 there were 122 recessions in 21 advanced economies although those economies were only in recession around 10% of the time. The video is well worth a look and presenter Tom Chitty does a good job explaining things.
Traditional economic measures, such as gross domestic product (GDP), productivity and economic growth remain fundamentally important but they’re not the whole picture. We think economics is ultimately about improving people’s living standards but you can’t look at GDP as the indicator to focus on.
US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile.
The introduction of the living standards framework in New Zealand takes into account environmental resources, individual and community assets, ‘social capital’ – which includes cultural norms and how people interact – and human capital, such as people’s health, and their skills and qualifications.
By living standards, the NZ Treasury means more than income; it’s people having greater opportunities, capabilities and incentives to live a life that they value, and that they face fewer obstacles to achieving their goals.
Limitations of GDP as a measure of standard of living – see list below.
- Regional Variations in income and spending
- Inequalities of income and wealth
- Leisure and working hours
- The balance between consumption and investment
- The shadow economy and non-monetised sectors
- Changes in life expectancy
- Innovation and the development of new products
- Defensive expenditures