What's Wrong With GDP?

GDP is turning 80. Here's why some economists think it needs to change.

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Gross domestic product, or GDP, is such a fixture in economic news that saying it's having a birthday sounds patently absurd – like announcing that the sky or breathing is having a birthday.

But it's true: Perhaps the most prominent economic indicator out there turns 80 on Saturday. On Jan. 4, 1934, economist Simon Kuznets presented the Senate with the first set of national economic accountsthat added up total economic activity (though only years later did it get a more formal title: "gross national product," or GNP). GDP and GNP, though not exactly the same, are very similar measures. During its 80-year lifespan, GDP has made some enemies, as economists over the years have raised objections to how GDP measures economic health.

One issue is that it's not always the greatest short-term indicator. Though markets hang on each quarterly GDP reading from the Commerce Department, quarterly readings can be off by a wide margin, judging by one related measure of the economy's size. Gross domestic income (GDI), which measures total income economy-wide (instead of total spending and investment, like GDP), should in theory equal GDP, and indeed over the longer term, the two track closely.

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But in those periodic readings of GDP, there can be incomplete information, meaning the two measures can be far apart on a quarterly basis. Sometimes one will even shrink while the other grows. The Federal Reserve Bank of Philadelphia has gone so far as to try to find a happy medium in a measure called"GDPplus." The below chart shows the same period as the above chart, showing the wide differences in growth rates between GDP versus GDI and GDPplus.

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Getting the numbers on GDP exactly right has inspired some economists to find a replacement measure, but there are those who have even bigger problems with GDP.

"There's lots and lots it doesn't capture," says Michael Green, an economist and executive director of the Social Progress Imperative, an organization that has created the Social Progress Index (SPI) – an indicator measuring a nation's well-being by looking at non-economic indicators like whether people have access to basic medical care and higher education. "[GDP] doesn't tell us about the quality of our lives in terms of the real things that matter to real people."

Green uses China and India as examples. Though the two emerging economies are growing strongly, Green says the well-being of the Chinese and Indian people is not keeping pace, with the two countries ranking at 32 and 43, respectively, of the 50 nations the index measured in its last count (in case you were wondering, the U.S. was ranked sixth).

Broadly speaking, well-being and economic growth tend to be correlated, says Green, but having an indicator that shows whether people's lives are improving alongside the economy could help governments understand the quality of economic growth.

"What we can do with our SPI is we can actually look at the relationship between economic progress and social progress," Green says. "Wouldn't you want to know whether your growth is also leading to social progress?"

Paraguay has taken this idea to heart, and last year said it would take the index into account in its economic development plans. Meanwhile, the country of Bhutan long ago decided to make well-being its key economic indicator, deciding in 1972 to measure Gross National Happiness.

It seems unimaginable that the U.S. would one day throw out GDP in favor of a happiness gauge. Then again, given enough pushback from economists, it might be conceivable that somewhere beyond the ripe age of 80, the nation's GDP will finally get a makeover.

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