Why GDP Is Not an Accurate Measure of the Economy

When economists, journalists and politicians talk about the strength or weakness of the national economy, they cite one main statistic: GDP. The metric, which stands for gross domestic product, single-handedly quantifies the output of national economies, guides the action of central banks and acts as the universal benchmark when economies officially enter and exit recessions. Yet according to some macroeconomists, the measure may be structurally flawed. It is imperative to note that even some of the foremost critics of the measure admit that any hard evidence of mismeasurement is difficult to come by, and any improvements would amount to small tweaks rather than large-scale changes. Still, there is a case to be made that GDP, which has been largely unchanged since the 1930s, does not account for the entirety of the modern economy.

GDP Doesn't Include Increases to Standards of Living

One supposed flaw within GDP calculations is that measuring solely by price inherently undervalues certain products by discounting their contributions to overall productivity and standards of living. Medical breakthroughs, for example, are quantified solely by the price of the treatment, ignoring the benefits of shorter hospital stays and longer life expectancies they create. In the same vein, as the Council of Economic Advisers itself points out, improvements in infrastructure such as indoor plumbing and electricity provide a public good well beyond their market prices, as these services facilitate massive improvements in both production capabilities and quality of life.

GDP Doesn't Include Negative Effects on Nature

Another point of contention with traditional GDP calculations is that it is ill-equipped to counterbalance the negative effects of events against the positives. Perhaps the most important issues here relate to nature. After a large natural disaster, the subsequent rebuilding efforts require a substantial amount of development and investment, providing a temporary surge in GDP. Yet no one would argue that individuals, or the economy as a whole, are actually better off in the immediate aftermath of catastrophe. Environmentalists would take this logic a step further, arguing that GDP actually incentivizes short-term growth at the expense of long-term global health because it does not take into account the value of things such as clean air and sustainable means of production. One modern day example of this phenomenon can be found in the arguments for and against energy development policies such as fracking. 

GDP Doesn't Include Household Production

Perhaps the largest complaint with GDP is that does not take into account so-called household production, leaving groups of individuals such as stay-at-home moms entirely out of the calculations. While this is accurate from the perspective of counting the amount of money exchanging hands for the service, it acts to completely discount the productivity of the act. This creates an incongruity where a nanny being paid to watch a child contributes to GDP, while a mother staying at home and providing that service herself does not. The same logic applies to individuals who fix their own cars rather than hiring mechanics, or even those who paint a room in their house rather than hiring a professional. While the purchase of the paint from the local hardware store (or the purchase of baby formula and diapers) will count towards GDP, the time, labor and resulting productivity of the individual’s work will not. (For related reading, see: Limitations of GDP and Alternative Measures.)

In the modern economy, these potential measurement flaws have only been exacerbated. Just as with electricity, the full value of faster and farther-reaching internet access has proven elusive to capture, as the huge increases in interconnectedness and availability of information clearly carry a value beyond the cost of installation. The same can be said of free apps and services that are coming to dominate the modern economy, such as Google. Though the ad revenue that the company generates is included in the calculation of GDP, the productivity increase and elimination of endless hours of research in libraries are not. Additionally, as companies become more focused on improving quality rather than simply ramping up production and prices, these improvements may be missed entirely by the current metric. For example, how would GDP calculate the benefit of a free software update? Because increases in macroeconomic productivity tend to be exponential, these struggles to fully incorporate ever-changing, increasingly digital business models into GDP are likely to persist, if not worsen. (For related reading, see: Is GDP Really an Accurate Measure of Economic Growth?)

While these issues may cause some headaches for economists, they may actually signify some very good news for the economy. In the period of recovery since the Great Recession, economic growth as measured by GDP has been persistently slow. At the same time, the economic activities of the internet age that GDP struggles to capture have only grown. Call it wishful thinking, but if current calculation methods are ineffective in capturing some modern (let alone traditional) aspects of production, then the national economy may be growing faster than those calculations indicate.

(For more from this author, see: What M&A May Look Like Under President Trump.)