Internationally, gross domestic product (GDP) is the most commonly used measure of country’s national income. Essentially it reveals how much money was made in an economy over certain period of time.
But GDP is also among the world’s most criticised of economic yardsticks. It tends to be misused – GDP up = good, GDP down = bad – to judge government policy or make global comparisons. Trouble is, it doesn’t take environmental depletion, social or lifestyle considerations into account. China’s economy has been galloping along at whopping nine percent GDP growth year but hey, where would you rather be right now? And would you prefer to live in Singapore, where GDP growth over the longer term has outpaced New Zealand’s in recent years, or stay here, where you can take the kids skiing, mountaineering or fishing at weekends?
At the OECD Economic Forum, which preceded the ministerial meeting in Paris chaired by Prime Minister Helen Clark in late April, panel of economists brought GDP into calculations when they tackled: “Economic growth – what statistics do and do not tell us.”
Panel member Roland Spant, chief economist of the Swedish Confederation of Professional Employees, pointed out one problem: GDP’s deficiency as measure of production levels and productivity development in the public sector. This leads indirectly “to fundamental errors so great that some might conclude that there are never any productivity gains in the public sector”.
The reality may be that both production levels and productivity increases may be high within the public sector, but lack of hard data is distorting domestic debate and making international comparisons even more difficult.
Some countries have introduced volume measures when measuring GDP for the public sector. Others use standard assumptions about productivity gains, and those assumptions vary. Some countries (including Sweden) assume zero growth; others assume positive growth of anywhere from 0.5-2 percent annually. This leads to highly divergent GDP calculations and countries that assume productivity gains in the public sector appear to experience stronger growth than those which assume zero gains.
Spant’s main criticism of growth measures, however, is “the almost total fixation on GDP”, which includes all expenditures for investment, regardless of whether they are used to add to the capital stock, or simply to replace worn out or obsolete equipment and software. That’s why it is called “gross” domestic product – it does not allow for the depreciation of physical capital, or the wear and tear on factory machines, office equipment becoming outdated, and what-have-you.
Investment spending to replace worn-out and obsolete equipment is essential for maintaining the level of output, sure, but it does not increase the economy’s capacities, said Spant. If GDP were to grow as result of more money being spent on depreciation, it would not mean anyone had been made better off – no more money would be available for consumption; nor would there be any more output available in future periods, because the size of the capital stock would not have increased.
Net domestic product (NDP) however, deducts depreciation and Spant regards it as better measure for tracking factors associated with “the new economy”, such as the capacity for growth and prospects for increasing growth without stimulating inflation. He claims it is “an interesting measure of general welfare”, too.
The nub of his argument is that GDP was an acceptable measure when capital intensity and capital depreciation were fairly stable – under those conditions, GDP and NDP developed more or less in tandem. Under today’s conditions, however, the effect of placing almost all emphasis on GDP and neglecting NDP is to overestimate the real rate of economic growth; real productivity increases; the potential for increasing wages without risk to the labour market; business profits, thus increasing the risk of stock market bubbles; differences in growth rates (between the US and Europe, for eg,) and rates of growth and productivity after 1995.
New Zealand economist Brian Easton thinks the fly in Spant’s NDP ointment is the challenge of measuring depreciation, chore sufficiently complex to keep armies of accountants in work. Example: once upon time heaps of investment was pumped into the power-generating facility Marsden B. The plant was mothballed years ago and the investment presumably written off. This year’s energy crisis led to Marsden B being looked at in new light (while we still had power to throw light).
More important, Easton argues, is to get good measures of gross national product. But that’s another column.
Bob Edlin is regular contributor to Management.
