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Date: 2018-01-24 Page is: DBtxt001.php L0700-MT-GDP

Gross Domestic Product (GDP)

TPB Observation
Why is it that GDP is still one of the dominant metrics in modern economics? The fundamental flaws in GDP as a meaningful measure for economic performance were recognised many decades ago. Kuznets who developed the measure in the United States and Keynes understood the limitations before the Second World War! Kuznets and Robert Kennedy both spoke out about the flaws in the GDP metric in the 1960s. Sowhy did nothing get changed.
My experience as a corporate CFO may be helpful. It was so much easier to increase profts for stockholders in an environment of economic growth ... that is GDP growth ... than in one where the economy was stagnant ... that is no growth! In the late 1960s there was a lot of growth, but in the early 1970s the bubble burst and then worse, the OPEC oil shock that resulted in massive increase in energy costs for US companies that had become incredibly sloppy with their use of really cheap energy. Many companies got into serious financial difficulties and the Nixon / Ford / Carter series of administations in Washington were unable to make much difference.
It is my view that corporate thought leaders have had some role in promulgating the myth that economic growth is essential for profit growth. This has been copied by economists and political leaders who then conflate GDP growth with the potential for job growth.

TPB note: These words were penned around 2000
Gross Domestic Product (GDP) is a dangerously flawed metric. The way the GDP is compiled makes very little sense ... like most indexes the GDP is a measure, but what is being measured is far from clear.
Cost is NOT a Product
There needs to be clarity about the critical difference between product and cost. Much of the confusion in economic analysis and policy formulation would be avoided if there was a clear distinction about what is a product and what is a cost.
What belongs in the Gross Domestic Product?
Gross domestic product should be the output of the economy ... what the economy produces ... the product. Over time, more and more of the product is expressed as the cost of the product at the transaction level and over time the measure has become more and more inflated so as to become meaningless. Rather, it is much worse ... it has resulted in the wrong signals being sent about the prosperity of the nation!
Producers, consumers and prosumers
It is widely recognised that affluent consumers have been part of the success of the US economy ... good wages were part of this.
Henry Ford
Henry Ford is meant to have realized that a prosperous working class would eventually be the consumers of the automobiles that his company was manufacturing ... those that were producing were the same as those that were consuming. I associate Henry Ford's insight as being something of the origin of the idea of a prosumer.

The Keynesian Dynamic
Keynes was also very clear about the way wages fed into the success of the economy by expanding aggregate demand.
Keynes was clear about the dynamic of economic activity in a society ... but the Keysian clarity seems to be submerged in most modern economic analysts and policy dialog by ideas that are ideological more than anything else. Though there are powerful analytical tools available to process data ... most of the data are studied with a severe lack of transparency.
What is GDP used for?
GDP is one of those macro-economic indicators that has leverage over the economy because of its role in moving the capital markets ... but has little to no use as a tool to understand socio-economic performance.
16% of US economy is healthcare!
The statement is made over and over again that healthcare makes up 16% of the US Gross Domestic Product (GDP). At the same time the observation is made that the proportion is the highest among the top developed countries and the health state of the US population is lowest of the group. Clearly one metric is insufficient to describe the economic characteristic of the health sector.
In TrueValueMetrics (TVM) it is clear that quality of health is a valid product of the health sector, and the cost of this health care should appear in something that might be called the Gross National Cost. At the moment this does not exist as a national macro-economic indicator ... but it does feature as an element of the TVM system.

Economic Metrics ... If the GDP is Up, Why is America Down?
This Monthly Atlantic Magazine essay written in 1995 by Clifford Cobb, Ted Halstead, and Jonathan Rowe explains how the GDP metric measures the wrong things.
TPB Commentary: This essay written in 1995 and published in The Atlantic Monthly explains in some detail the many flaws in Gross Domestic Product (GDP) as a key economic metric. The authors explain some of the economic hostory that gave rise to GDP as a key metric in the 1930s and remained important during the 1940s and beyond. It is a long time now that the GDP has been questioned as the dominant metric about economic performance, but it has proved difficult to change. Better measures are also more subjective and more difficult to quantify, and it then becomes easier and safer to revert to GDP. More than 15 years after this article was penned, the issues remain important, and the TrueValueMetrics (TVM) initiative is a similar reform effort.
Open file 0452
Interesting Facts about GDP
This 2 page PDF sets out many of the high profile criticisms of GDP going back decades. These include remarks by Simon Kuznets (1934 and 1962) Robert MacNamara (1973) Joseph Stiglitz (2003) Lord Layard (2004), WWF/Global Footprint Network (2007) 
Open PDF ... InterestingFacts
Metrics ... GDP ... A dysfunctional metric
Edoardo Campanella ... Is It Time to Abandon GDP? ... Economist Edoardo Campanella examines the conceptual and technical flaws of the world’s most important metric, and asks whether and how it could be reformed.
Open file 12167
Open PDF ... GDP/UK-SNA-illegalactivitiesarticlefinalf_tcm77-365319
This is part of a series of articles describing changes to national accounts, detailing the improvements to National Accounts which will be made in September 2014 to ensure that the UK National Accounts continue to provide the best possible framework for analysing the UK economy and comparing it with those of other countries.
Open PDF ... GDP/UK-SNA-dcp171766_365274
Eric Zencey NYT GDP RIP
IF there’s a silver lining to our current economic downturn, it’s this: With it comes what the economist Joseph Schumpeter called “creative destruction,” the failure of outmoded economic structures and their replacement by new, more suitable structures. Downturns have often given a last, fatality-inducing nudge to dying industries and technologies. Very few buggy manufacturers made it through the Great Depression.
Open PDF ... Eric-Zencey-NYT-GDP-RIP
Metrics ... GDP ... A dysfunctional metric
Edoardo Campanella ... Is It Time to Abandon GDP? ... Economist Edoardo Campanella examines the conceptual and technical flaws of the world’s most important metric, and asks whether and how it could be reformed.

TPB note 161108: I enjoyed reading this article, but it reminded me of the amazing dysfunction of leadership over the past 50 years or so of my adult life. I read engineering and economics at Cambridge in the late 50s and one takeaway was the growing dangerous use of statistics for decision making in economics and the emerging power of data to improve technology and make it very powerful. Simon Kuznits, Robert Kennedy and others in the 1960s spoke eloquently about the need to do better than GDP when thinking about economic performance ... yet more than 50 years later it is still one of the dominant economic metrics. I was a corporate CFO for a number of years and in this role it was obvious that it was easier to improve profit performance in an economy that was 'growing' ... in other words GDP getting bigger ... but that was somewhat simplistic. Subsequently I have become convinced that technology driven productivity improvement and consumption based GDP growth will result in the dual existential crises of accelerated climate change and uncontrollable social unrest. A better outcome is possible, but this absolutely requires better metrics that embraces the people profit and planet of the socio-enviro-economic system from every possible perspective ... organization, place, product, people, processes. This is the 21st century, not the 19th!
Open file 12167
Eric Zencey NYT ... GDP RIP ... 2009
IF there’s a silver lining to our current economic downturn, it’s this: With it comes what the economist Joseph Schumpeter called “creative destruction,” the failure of outmoded economic structures and their replacement by new, more suitable structures.
Open PDF ... Eric-Zencey-NYT-GDP-RIP
Estimates of World GDP, One Million Years B.C. to Present
... constructing estimates of world GDP over the very long run by combining estimates of total human populations with estimates of levels of real GDP per capita.
TPB Note: This is interesting ... maybe ... but does little to help with our understanding of what is going on in the global and local economy at this point in history!
Open PDF ... GDP-Bradford-De-Long-Estimates-1998-Paper
Dysfunctional Metrics
Economics ... Our-Phony-Economy-HarpersMagazine-2008-06-0082042 ... Harpers ... READINGS — From the June 2008 issue ... Our Phony Economy
Open file 10909 Open PDF ... Our-Phony-Economy-HarpersMagazine-2008-06-0082042
R&D Recognized as Investment in U.S. GDP Statistics: GDP Increase Slightly Lowers R&D­to­GDP Ratio
Open PDF ... GDP-NSF-GOV-RandD-Recognized-as-Investment-in-US
The linearity of long term growth is a significant result which is accompanied by a severe break in all time series between 1940 and 1950: the slopes and mean increments differ by an order of magnitude, although their standard deviations are close. The nature of this break should be considered in more detail, but the estimates before 1940 and after 1950 were made by different rules and using quite different methodologies: there was no working notation of GDP before 1940 and thus there was no relevant data collected systematically.
Open PDF ... Kitov-and-Kitov-on-GDP.pdf

Beyond GDP
What comes next? How to get to beter metrics?

Open PDF ... Stiglitz-Sen-Fitoussi-Report-Reflections
Sean McElwee ...Moving Beyond GDP
The Inclusive Wealth Index (IWX) is a unique measure of economic progress that examines all of a country’s capital sources, including manufactured capital, human capital and natural capital. It measures the key inputs to a country’s productive capacity include natural capital, human capital and manufactured capital. Hopefully in the future it will also include a measure of social capital. By examining progress towards a “Green Economy,” reporting of the Inclusive Wealth Index is a first step away from GDP and toward a more comprehensive metric of human progress.
Open file 9232 Open external link
Using the IWX measure, 14 of the 20 countries surveyed were growing sustainably, including the United States. However, the growth was not as dynamic as GDP growth. The United States provides an example. While GDP (the red line) increased by 37%, Inclusive Wealth Index (the dark green line) increased by only 13% because of a steep decline in natural capital (the light green line). Human capital (yellow line) increased by 8% and produced capital (grey line) increased by 68%.
Over time, in every country, human capital increased, and in most countries, produced capital increased as well. However, in Colombia, Nigeria, South Africa, Russia, Saudi Arabia, and Venezuela the natural capital depletion was not offset by increases in human capital and natural capital. This indicates that their economic growth is not sustainable.

By taking into account the capital formations which determine future growth, countries can better prepare themselves for the future. The U.N. report suggests that countries should target monetary and economic policy to IWI to ensure sustainable, rather than short-term growth. Such a shift was recently suggested by Jeffrey Sachs in a recent Huffington Post op-ed:
January 26, 2012 ... Lew Daly, Stephen Posner
Open PDF ... Demos-Beyond-GDP-2012

Basic observation
Gross Domestic Product is a commonly used macro-economic indicator that measures the size of an economy
Prevailing response
It is a useful measure, but not very powerful for the analysis of complex relationships in the economy and the complex interactions that make up both the local situation and the world situation.
A better response
In addition to macro economic measures, there needs to be a lot of management metrics so that the how and why can be answered. GDP is just one measure or hundreds that are possible, and most more specifically useful for analysis.

The text being discussed is available at

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