Capitalism, Economy

GDP a poor measure of progress |WEF

Gross Domestic Product- GDP is an indicator of countries national wealth. The GDP represents monetary value of all goods and services produced by a county over a specified period of time within its territory.

Measuring the GDP is complicated work. Generally, it can be measured by using incomes and expenditures separately. The income approach is calculated by adding up total compensation to employees, gross profits for incorporated and non-incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

Recently, when gathering in Davos, Switzerland leading economists and academics agreed that ‘‘GDP is a poor way of assessing the health of our economies and we urgently need to find a new measure.’’  Speaking in different sessions, IMF head Christine Lagarde, Nobel Prize-winning economist Joseph Stiglitz, and MIT professor Erik Brynjolfsson stressed that as the world changes, so too should the way we measure progress.’’

Stéphanie Thomson, Editor, World Economic Forum; writes- 

A country’s GDP is an estimate of the total value of goods and services they produce. But even when the concept was first developed back in the late 1930s, the man behind it, Simon Kuznets, warned it was not a suitable measure of a country’s economic development: “He understood that GDP is not a welfare measure, it is not a measure of how well we are all doing. It counts the things that we’re buying and selling, but it’s quite possible for GDP to go in the opposite direction of welfare” Brynjolfsson told participants.

measuring GDP
Image: WEF

Today, with the changes brought on by the Fourth Industrial Revolution, the measure is even less of a reflection of the things that really matter: “We need a new model for growth. Just as we’re reinventing business, we need to reinvent the way we measure the economy,” the MIT professor added.

Speaking in another session, Lagarde made almost exactly the same argument: “We have to go back to GDP, the calculation of productivity, the value of things – in order to assess, and probably change, the way we look at the economy,” she said.

It builds on a point made by Stiglitz earlier in the week: “GDP in the US has gone up every year except 2009, but most Americans are worse off than they were a third of a century ago. The benefits have gone to the very top. At the bottom, real wages adjusted for today are lower than they were 60 years ago. So this is an economic system that is not working for most people,” he said.

Why, some might ask, does this debate even matter to most people? Is it not something for economists and policy-makers to worry about? Not according to Stiglitz: “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.”

The Annual Meeting was taking place in Davos from 20 to 23 January, under the theme “Mastering the Fourth Industrial Revolution”

Original post : World Economic Forum


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