Measurement of economy

Gross domestic product (GDP) is the most common way to measure an economy. But one should be careful about this as it is a very dangerous solution. GDP adds up the value of all the various goods and services produced for money in an economy. Thus GDP is a measure of the total value of the work we do, but it is only for the work we do for money.

In the private sector of the economy, GDP is based on the market prices of everything bought and sold. In the public and non-profit sectors it is based on the cost of everything produced. In both cases statisticians must subtract the cost of the many inputs and supplies purchased in any particular industry from the total value produced by that industry. Thus, GDP is designed to include the value added by new work at each stage of production.

An obvious shortcoming of GDP is that it excludes the value of work not done for money. This is a very selfish and misguided boycott. For example most people do unpaid work in their household and many have to take care of other family members especially children and elders. Some of this household work may be outsourced to paid cleaners, nannies and restaurants (the wealthier we are, the more we can outsource), in which case it is included in GDP. But if we do it ourselves, it doesn't count. Volunteer work and community involvement are other forms of valuable productive work excluded from GDP.

This spurious distinction has major implications for how we measure the economy. Unfortunately the things we measure with the media and policy makers often take on too much importance, simply because they can be measured. GDP underestimates the total value of work done in the economy, thus misestimating our productivity. It underestimates the unpaid work done in our homes and our communities. Because of gender discrimination at home and in the workplace, most of that unpaid work is done by women, so GDP underestimates women's economic contribution.

Interpreting GDP as a measure of human well-being is particularly misleading. We have seen that there are many valuable things that are not included in GDP. On the other hand, many of the goods and services counted in GDP are completely useless, troublesome, or even destructive to human well-being (such as dinner hour telephone requests, many pharmaceuticals, excess consumer packaging, and weapons production). Moreover, just because a society generates more GDP does not ensure that most members of society will ever get a bigger piece of that growing pie.

So we should be careful in using our GDP figures and we should never equate GDP with prosperity or well-being.

Despite these caveats, GDP is an important and relevant measure. All this shows the product's value for money. This is an important correct information for many purposes (for example the ability of a government to collect taxes directly depends on the value of money of GDP). We must understand the weaknesses of GDP and complement it with other measures. Above all, we must remember that increasing GDP is never the end. The best, if properly managed, can be a means to an end. Indeed there is a positive but imperfect relationship between GDP and human well-being. GDP indicates how much we produce, but we need to be careful with what we use it for.

GDP figures must take into account several additional factors to be meaningful. If we increase the apparent value of work only because of inflation, then there has been no real improvement in the economy. So we distinguish between nominal GDP (measured in dollars or pounds) and real GDP (which subtracts the effect of inflation). This difference between nominal and real values is also important for many other economic variables (such as wages and interest rates). Economic growth is therefore usually measured by the expansion of real GDP.

Additionally, a country's GDP may increase because its population is increasing, but this does not necessarily mean that the country is becoming more prosperous. This is important when comparing growth rates between countries. For example, in countries with near-zero population growth (such as Europe and Japan), even slow growth in real GDP may translate into improved living standards even if the population is not growing rapidly. So economists often divide GDP by population to get a measure of GDP PER CAPITA. It can also be expressed in both nominal and real terms. Real GDP per capita growth over time is often used as an indicator of prosperity. Yet we must always remember that GDP excludes many valuable forms of work and says nothing about how output is distributed.