GDP: a brief history

One stat to rule them all.

BY ELIZABETH DICKINSON | JANUARY/FEBRUARY 2011

Out of the carnage of the Great Depression and World War II rose the idea of gross domestic product, or GDP: the ultimate measure of a country's overall welfare, a window into an economy's soul, the statistic to end all statistics. Its use spread rapidly, becoming the defining indicator of the last century. But in today's globalized world, it's increasingly apparent that this Nobel-winning metric is too narrow for these troubled economic times. 

1937: Simon Kuznets, an economist at the National Bureau of Economic Research, presents the original formulation of gross domestic product in his report to the U.S. Congress, "National Income, 1929-35." His idea is to capture all economic production by individuals, companies, and the government in a single measure, which should rise in good times and fall in bad. GDP is born.

1944: Following the Bretton Woods conference that established international financial institutions such as the World Bank and the International Monetary Fund, GDP becomes the standard tool for sizing up a country's economy.

1959: Economist Moses Abramovitz becomes one of the first to question whether GDP accurately measures a society's overall well-being. He cautions that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output."

1962: But GDP evangelists reign. Arthur Okun, staff economist for U.S. President John F. Kennedy's Council of Economic Advisers, coins Okun's Law, which holds that for every 3-point rise in GDP, unemployment will fall 1 percentage point. The theory informs monetary policy: Keep growing the economy, and everything will be just fine.

Alfred Eisenstaedt/Time&Life Pictures/Getty Images

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Elizabeth Dickinson is assistant managing editor at Foreign Policy.

VOLUCRE

3:12 PM ET

January 3, 2011

Subjective Measurements Are Worthless

The author seems willfully oblivious to the fact that "happiness" means something different to everyone.

For example, she approvingly cites the U.N. Human Development Index ("H.D.I."), which "measures such factors as education, gender equality, and health." The creators of the H.D.I. carefully chose these factors to flatter progressive European nations where free public universities, free public health care, and anti-gender-discrimination laws and affirmative action for women have become the norm. But most of the world, including the two superpowers, the United States and China, does not share the progressive European conviction that government health care, education and gender-sameness programs are even desirable, let alone measures of happiness or development.

Is it not somewhat ironic that the United States and China, the two most powerful countries in the world, and all of the rising powers such as Brazil and India, rank relatively low on the H.D.I.? Is it not strange that the semi-socialist European nations that dominate the H.D.I. are exactly the nations suffering from financial crises, workers' revolts, excessive government debt and massive unemployment? Surely, we should be skeptical of a "development" index in which declining nations rank most highly. The vast government entitlement spending that buys a high ranking on the H.D.I. is exactly the disease afflicting the failing nations of Europe.

The value of the GDP is that it is based on one objective criterion, and requires no subjective balancing of factors. A high GDP is good and a low GDP is bad, and it's virtually impossible to dress up one as the other.

Obviously, GDP is an imperfect measurement. One problem is that it does not measure the unmonetized harms caused by industry--for instance, environmental pollution that destroys resources and must eventually be cleaned, stress and poor work conditions leading to higher medical bills, and disruption of family and informal relationships where work is efficiently performed without money exchanging hands. China's "Green GDP" attempts to monetize the environmental harms caused by its industries, which it will eventually have to pay for, to get a more accurate "net" figure for how much work was done. The next step in improving the GDP's accuracy will be accounting for negative externalities like these.

The wrong approach, however, would be to toss out the baby, objectivity, with the bathwater, by adopting subjective criteria such as "happiness," or criteria like "education, gender equality, and health," each of whose comparative value would be unknown even if it could be accurately measured. Better to stick with our problematic, but at least somewhat meaningful GDP.

 

MCHAN1

4:12 AM ET

January 4, 2011

Measuring What Matters

First, I must say I agree entirely with the comment above that the Green GDP should replace the current GDP as the official measurement of national well-being. While the political costs of implementing the Green GDP may be extremely high, the costs of not doing so are likely to be far higher in the long-run. Adopting the Green GDP would be an important first step to transitioning to a steady state economy which pursues economic growth within the confines of environmental limits.

That said, I do not believe that the UN Human Development Index should be dismissed as unimportant. In fact, the H.D.I. is a crucial measurement precisely because it goes beyond income to include health and education as indicators of well-being. Recently, it has even evolved into a more sophisticated instrument that is now able to adjust for the effects of inequality and gender on existing indicators. According to the 2010 UN Human Development Report, “significant aggregate progress in health, education and income is qualified by high and persistent inequality, unsustainable production patterns and disempowerment of large groups of people around the world.” As such, the report introduces three new multidimensional measures, including the ‘Inequality-adjusted HDI’ (IHDI), the ‘Gender Inequality Index’ (GII) and the ‘Multidimensional Poverty Index’ (MPI).

A key feature of the IHDI is that it takes into account how human development is distributed within any given country. Furthermore, it captures the loss in human development as a result of inequalities in income, health and education, which supports the often over-looked argument that inequality matters. Indeed, the report notes that “people in Sub-Saharan Africa suffer the largest HDI losses because of substantial inequality across all three dimensions” (2010:87), with countries such as Mozambique losing more than 45% of its HDI value. (ibid) The MPI is also highly significant in its ability to complement existing money-based measurements of poverty to reflect the multifaceted nature of poverty. By capturing and conveying “overlapping deprivations” (2010:95) faced by the global poor, the index bears powerful testament to the need for a renewed and intensified global commitment to fulfill the MDGs. Furthermore, that the index can be broken down to reveal the changes in multidimensional poverty for different regions and ethnic groups (among other categories) portends extremely useful implications for policy.