GDP and Inflation

Why is it important to look beyond GDP and growth?

Friday February 02, 2018 Fiona Stokes

Because economics is about people, and our Prime Minister emphasised this in her speech on Wednesday, which was not a State of the Nation speech but a speech about the next 100 days of a Labour-led government.  In her speech, Prime Minister Ardern noted that she has asked the Finance Minister to accelerate the work the Treasury has begun on establishing a Living Standards Framework.  This is a clear signal of a behaviour change in policy and investment decisions, and one that BERL welcomes.  

 

Economists, including BERL, have for some time acknowledged, and argued, that Gross Domestic Product (GDP) is an imperfect measure and that a better understanding is required to appropriately use this measure.  The following are some of the issues that have been identified with using GDP as a measure:

  • GDP tells us nothing about how growth is distributed at a household level.  Whether GDP goes up or down at a national level, it gives no indication of who is benefitting from these gains or how the average household is faring.

  • GDP measures the quantity of goods and services but not the quality.  For example, money spent on alcohol and gambling is just as ‘good’ by GDP standards as money spent on books and exercise.  This means what is ‘good’ for GDP is often harmful to other criteria such as health and well-being.

  • GDP does not distinguish between expenditure that positively influences or increases human welfare and that which threatens it, e.g. treating smoking-related diseases or obesity, or military spending.

  • GDP tells us nothing about the sustainability of economic activity.  Consumption financed by borrowing adds to GDP just like consumption financed by real gains in household buying power.

  • GDP ignores environmental problems.  Economic activity that depletes natural resources is just as ‘valuable’ by GDP standards as economic activity fuelled by renewable resources.  

  • GDP tells us nothing about the value generated by non-market services provided in households and in the community.  GDP does not add the monetary value of the unpaid care of households, children, the elderly or the disabled by family members.

  • GDP does not always track with indicators of social well-being such as rates of poverty, literacy and life expectancy.


Ten years ago, in 2008, Nicholas Sarkozy created a commission, The Commission on the Measurement of Economic Performance and Social Progress (CMEPSP).  One of the aims of this Commission was to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement, and to consider what other measurements of economic performance and social progress may be more relevant.  A report was produced by this Commission – google it – and for an indication of how important this Commission and its associated report was, consider the authors - Stiglitz, Sen and Fitoussi.

 

The Living Standards Framework is one of many international examples that have arisen from the debates around GDP and this Commission, not to mention the work of the OECD in this space.  The Living Standards Framework is an outcome-based framework that is based on four capitals.  These capitals are interdependent and work together to support sustainable, intergenerational well-being.  

 

The Living Standards Framework is not new, the Treasury have been working on this project for a number of years.  However, for some it is a new approach because it signals not only that economic relationships are always changing, but that our measurements systems need to adapt to this change.  It also calls into question the following points regarding what we measure; why we measure it; how we measure it; who we measure; when we measure this indicator; and why we measure it.  

 

For me personally, it is the why that is the most important part - he tangata he tangata he tangata.  But I’m part of a team, and at BERL we pull together - Ehara taku toa i te toa takitahi. Engari, he toa takitini. Success is not the work of one, but the work of many.