Is GDP a good measure of economic progress?*
Olivier Vaury (École Normale Supérieure, Paris)
Every year, or even every quarter, economic growth figures are anticipated and scrutinised to assess the economic health of a country. In spite of abundant commentary in the media by politicians and economists, the very notion of economic growth remains elusive: who really knows what it really measures ? Yet the level of GDP (or GDP growth) is probably the most widely used indicator for piloting economic policies around the world and for making international comparisons.
When one says that “GDP growth reached 3% in 2002”, what does that mean ? Broadly speaking, GDP measures the amount of goods and services produced in a given place (a country, a region, etc.), in a given period of time (a year, a quarter, etc.). All goods and services ? Well, that’s where the whole issue lies!
Our point is that GDP includes goods and services that do not increase a country’s economic wealth, and, furthermore, excludes goods and services that do. Thus, the use of GDP as an indicator of economic progress is flawed and results in biases in international comparisons.
What GDP forgets
“Marry your cleaning person, and you will make GDP drop!”. This weird remark, made by the famous French economist Alfred Sauvy, points to the fact that GDP excludes (or significantly underestimates) goods and services produced outside the official market economy. The bits forgotten by GDP can be divided into three categories:
- Household production: marrying the cleaning person means transforming a standard marketed activity (house cleaning, paid at a given rate, etc.) into domestic work, not accounted for in GDP as there is no way to measure the value added by this service (no price paid). A priori, this change does not alter the level of service enjoyed by the newly married consumer (in both cases, house cleaning was made, by the same person; this example is used to point out the...
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