Calculating the GDP involves many decisions and using it can be controversial as in Greece.

Why the GDP is Much More Than a Number

Jul 28, 2014 • 266 Views

The GDP measures a country’s production. Just add together the value of the goods and services that were produced during one year and you have the GDP? Not really. Like the Malaysian proverb that says we should not think there are no crocodiles just because the water is calm, the GDP is not as it appears on the surface.

War was the original reason that countries wanted to know the value of their output. During the Anglo-Dutch War in 1665, if England knew more about its wealth then it could figure out how much to tax people. Fast forward to World War II and the United States. The same situation. With a war to wage, FDR needed to know how much land, labor and capital could be allocated to military production. From that task emerged the modern concept of the GDP…and all of its dilemmas.

Calculating what a nation produces involves answering a host of questions.

  • Do you count illegal activity? 60 years ago the answer was no but now, not necessarily.
  • Should you include non-market home production? But that means if you marry your accountant then the GDP will decrease.
  • Would it be wise to adjust the GDP when prices fall but quality rises? After all, laptop prices are way down while computing power is up.
  • Are free online services a concern? Maybe Google searches are a service that should boost the GDP.
  • How to account for environmental harm that results from production? Should we subtract the value of the damage from GDP?

You see where we are going. Depending on what you count, the GDP could go anywhere. And we have not even touched globalization and how much to include when an item is made in 5 different countries.

Still though, we are in relatively calm GDP territory until we relate all of this to people. And that takes us to Greece.

Brought in to overhaul the Greek statistics office, economist Andreas Georgiou concluded that the Greek deficit was higher than had been reported and its GDP was lower. The impact on the country was calamitous. Georgiou’s revised deficit and GDP figures necessitated an unheard of discipline in order to secure the bailout loans it needed from the international community. Gargantuan government spending had to be cut, government employees fired, government pensions slashed.

The old numbers had been a useful fiction that let Greece adhere to eurozone guidelines. Because Georgiou injected some reality, he has been accused of doing the falsifying. The crime is called breach of faith and the sentence could be 5 years in prison.

All because of the GDP.

Our bottom line: I wonder whether the GDP returns us to fractal mathematician Benoit Mandelbrot. Yes, we can look at the coast of Great Britain from afar and see a lovely uninterrupted curving line. But move in to a closer view of the coast (or the GDP) and the hazardous jagged zigs and zags start to appear.

Sources and more...While GDP: A Brief But Affectionate History is a 140 page story of the GDP that I recommend for a fast and informed read, you might also enjoy the econtalk hour-long author interview. Further showing why the GDP is much more then a number, the Andreas Georgiou story is told here and here. Finally, while econlife has looked at the GDP many times, our discussion of Poor Numbers was especially interesting on GDP inaccuracies. (Please note that the above description of Benoit Mandelbrot appeared in a past econlife.)  

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