GDP for Dummies

Chin Rey

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No, the title does not refer to Trump or to Brexiteers although the topic is closely related to both.

Throughout all those discussions about USA, EU and the UK the topic of economic growth pops up and it nearly always is about the increase in GDP. Way too many people believe that GDP (Gross Domestic Product) is a reliable measurement of a nation's ecomony but it isn't really.

Here's a classic from the recent Greek crisis:

A tourist checks in to a hotel and pays 100 Euro. The hotel owner takes the money and runs down to the local butcher to pay his bill. The butcher runs to the local whore and pays what he owes her for some unspecified services. The whore runs to the hotel owner and pays the bill for the room she used last night. FInally, the tourist returns to the hotel reception, complains about the room, demands and gets his money back and leaves.
This exercise added 500 Euro to the GDP. How much actual value did it add? It's actually hard to see in this example but it does illustrate the limitations of GDP has.

A few more examples:
A stock broker buys some stock for 100 million dollars and immediately sells them for 150 million (lucky guy!)
Added to the GDP: 250 million dollars
Added to actual wealth: 0

A homeless man brings a deposit bottle to a store.
Added to the GDP: 60 cent
Added to actual wealth: Probably about ten cent

A man goes down to the local river, catches a fish and takes it home for dinner for himself and his family
Added to the GDP: 0
Added to actual wealth: One meal for a family - 5-10 dollars perhaps.

What GDP actualy measures, is how fast money circulates. That can be a good indicator of how prosperous a nation is but it has to be taken with a grain of salt.
 
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Innula Zenovka

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Adair Turner (whom I knew at university) provides some very helpful examples of why GDP is sometimes a very poor measure, particularly when it comes to assessing the overall economic costs and benefits of computerised automation and AI, in this lecture:


He uses a recurring example of a farm with 100 labourers, of whom 50 are made redundant by new farming techniques that enable farmers to produce the same crop in a far less labour-intensive manner.

The discussion of how it affects the GDP calculations if 25% of the redundant labourers turn to crime, thus either forcing the police to increase their numbers by recruiting the other 25% to protect farms or forcing the farmers to hire private security companies (staffed by former farmworkers) is quite illuminating, as is the discussion of the difference it makes depending on whether the police increase their recruitment or the farmers hire private security.

It's certainly a far more artificial measure than we tend to think.
 
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Kara Spengler

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This reminds me of one of the challenges in the phone game sim city: buildit. It is to raise x amount of money in a certain period of time. Of course everyone quickly realizes it is gross, not net. So they run to the store to find things people will want, buy them, then sell them.
 

Chin Rey

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Adair Turner (whom I knew at university) provides some very helpful examples of why GDP is sometimes a very poor measure, particularly when it comes to assessing the overall economic costs and benefits of computerised automation and AI, in this lecture:
That's a really interesting factor I wasn't aware of.

So, GDP tends to overestimate the significance of zero-sum economy, underestimate the significance of high tech development and, of course, completely ignore non-monetary economy. That means it's really only reasonably reliable for "traditional" 20th century western world style economies and there aren't many of them around these days.