From GDP’s perspective, bigger = better. Is it though?
Gross Domestic Product (GDP), the yardstick of success, as most know, is the standard measure of the value added created through production of goods and services in a country for a period of time. In simple terms, it is how much the economy makes and consumes. Because GDP is collected at the current price, one cannot compare two periods without making adjustments for inflation. Thus, economists compute real GDP by using various statistical tools to obtain information about the size of an economy. With that, the growth rate for GDP, more often than not, will be used as a benchmarking tool to reflect on the general health of the economy.
GDP came about some time during the second world war, developed by economist Simon Kuznets. According to Kuznets, national income should be the sum of private consumption, investment, and government spending. He argued that government spending should be included along with the economic production by individuals and companies, due to wartime spendings, and it should rise and fall throughout the economic cycle. Because of his method of including government spending into a country’s income, it soon found acceptance around the world and continues to this day.
While living standards across the globe has been increasing, the standard metric of GDP hardly reflects a nation’s welfare and well-being. Policymakers and economists are fixated on this method as they measure the changes in GDP to gauge whether the average citizen has gotten better or worse off. Quoting Robert Kennedy on this election speech in 1968,
“It (GDP) measures everything in short, except that which makes life worthwhile.”
It is clear to justify where Kennedy came from, as an increase in the production of cars or industrial buildings may cause environmental issues that are not accounted for. Put simply, if one decides to demolish and build back the exact same building, it would contribute to an increase in GDP, but does it mean you are better off?
Everyone is obsessed with growth. It is embedded in our society as a metaphor for prosperity. Economic growth has been the focus since the mid-20th century, as more politicians fixate over growth in GDP, using it as a holy grail when seeking re-election. While it is true that GDP has been increasing over the years, so has wealth inequality. With the rise of capitalism and privatisation in the economy, the wealth gap is more pertinent whether in a developed or developing country. Yet we are still fixated and structurally dependent on growth, as most central banks pursue economic expansion equating higher GDP to higher taxes. From GDP’s perspective, bigger = better.
While I believe we should all dethrone GDP as a universal measure, I understand the challenges faced in replacing the system. Perhaps as investors and the general society as a whole, we could all be less reliant on the output produced by GDP as it is only one metric. The flawed era of GDP may come to an end over the next few decades, having leaders like Jacinda Arden who unveiled the first-ever well-being budget for New Zealand in 2019.