Tuesday, July 21, 2020

Why GDP?

 Two economic professors find a dead rat while on a long stroll. In disgust, the older don dares his younger colleague: “if you eat it, I’ll pay you $10,000”. The younger economist makes a quick cost-benefit analysis in his head, then accepts the challenge, to his colleague’s surprise. 

Sometime later, realizing the enormity of his financial loss, the older man offers to reciprocate to get his money back. Feeling ashamed of being the only one to eat a dead rat, his younger colleague quickly agrees.

A few days later, feeling quite foolish about what happened, the younger don laments: “Looks like we both ate dead rats for nothing”. The more senior professor reassures him, “Yes, but remember we increased GDP by $20,000”.
GDP has been increasingly challenged on many grounds as a measure of economic and social progress. Clearly, GDP does not take account of other dimensions of wellbeing, natural resource depletion or environmental damage.  Much care work by family members which goes unremunerated and thus unrecorded.
Excluding some economic activities, but not others, when calculating a country’s national income is also problematic as it is difficult to agree on what economic activities should be included to enhance welfare.
Interestingly, US and European statistical offices only started national income accounts after the Second World War using Simon Kuznets’ pioneering work for the Roosevelt administration.
Robert F. Kennedy famously quipped over half a century ago, GDP “measures everything, except that which makes life worthwhile”.

No comments: