Problems With the GDP Equation

    There is a topic that has been debated for a time. Both related to the process of making economics and increasing its (economics) validity. Its simple explanation is total monetary value of sold products and services in a certain country in a certain time. As you may know GDP equation has been used for measurement of the wealth of nations. And some time the wealth had been observed as a correlated factor to the overall wealth and the standards of livings of the nations. But latest economic outcomes tell us the opposite and GDP measurement is not sufficient because of its out-of-date variables and its causes to overlook some of the things that we should consider in 21^st century. On the other hand it is also necessary for the calculation of production capacity, means that we can’t ignore it.

    Before the starting point of our discussion about GDP’s usage in modern economy, we will see from expenditure approach (Income=Expenditure=Production) that Y = C + I + G + NX (Y=GDP, C=Consumption by households both domestic and abroad, I=Investment both domestic and abroad, G=Government expenditure except interest and transfer payments, NX=Net exports Exports-Imports) (Gross Domestic Product (GDP), 2022). First of all, because of the out-of-date variables that GDP includes in itself, using GDP per capita (GDP/Total Population) as a calculator of the overall wealth of nations becomes a factor that leads increasing inequalities among different classes. GDP fails to capture the distribution of income across society – something that is becoming more pertinent in today’s world with rising inequality levels in the developed and developing world alike. It cannot differentiate between an unequal and an egalitarian society if they have similar economic sizes. (Amit Kapoor, 2019) Even though market inequality is necessary for the continuation of the capitalist economy, that means limited circulation of the improvement process with the competition, this type and degree of inequality among citizens undermine the basics of our system and will collapse of our values towards the system. So, we can observe that usage of GDP can lead to inequalities. Beyond a certain point, and not least during an economic crisis, growing income inequalities can undermine the foundations of market economies. They can eventually lead to inequalities of opportunity. This smothers social mobility and weakens incentives to invest in knowledge. The result is a misallocation of skills, and even waste through more unemployment, ultimately undermining efficiency and growth potential. (Orsetta Causa, 2014)

    After the inequality problem that GDP calculation has affected, the problem of missing inputs in GDP equation will arise. Because ancient GDP calculation includes just variables that have monetary values. However, the influence of modern economy to the non-monetary factors also affects the overall economy despite they don’t have monetary equivalent. For example, GDP takes a positive count of the cars we produce but does not account for the emissions they generate; it adds the value of the sugar-laced beverages we sell but fails to subtract the health problems they cause; it includes the value of building new cities but does not discount for the vital forests they replace. As Robert Kennedy put it in his famous election speech in 1968, “it [GDP] measures everything in short, except that which makes life worthwhile.” (Amit Kapoor, 2019) And also GDP became obsolete due to the fact that modern economy has been deviated towards majorly service economy rather than based on production as in 19^th and 20^th centuries. From my point of view, GDP should remain its presence in order to evaluate the production, income and expenditure capacity separated from external factors. As Krugman put it, it’s a number we need for many purposes. But on its own it isn’t an adequate measure of economic success (Krugman, 2018). But there should be a separated equation or sets of calculations that will include factors that don’t have monetary equivalents but at the same time affect the life standards of the people, such as Bhutan’s attempt to measure Gross National Happiness, which considers factors like equitable socio-economic development and good governance, and UNDP’s Human Development Index (HDI), which encapsulates health and knowledge apart from economic prosperity.

    In conclusion, I tried to cover some of the main problems that we have with GDP equation and gave some useful examples about it. Whether we have an opinion about the GDP equation, it will transform itself and it will create a separate calculation forms to be able to implement itself within the modern and evolutionary environment of the economics, which is a completely different matter that economics community has been discussing.

 

References

Amit Kapoor, B. D. (2019, October 04). GDP Is Not a Measure of Human Well-Being. Retrieved from Harvard Business Review: https://hbr.org/2019/10/gdp-is-not-a-measure-of-human-well-being

Gross Domestic Product (GDP). (2022, July 29). Retrieved from Investopedia: https://www.investopedia.com/terms/g/gdp.asp

Krugman, P. (2018, Aug 30). For Whom the Economy Grows. Retrieved from New York Times: https://www.nytimes.com/2018/08/30/opinion/economy-gdp-income-inequality.html

Orsetta Causa, A. d. (2014). Growth and inequality: A close relationship? Retrieved from OECD: https://www.oecd.org/economy/growth-and-inequality-close-relationship.htm

02/08/2022