EKIP– Expert Club for Economics and Politics A Different Opinion
Undoubtedly the most well-known and widely used measure of macroeconomic performance is gross domestic product. Like many other historical events, it is difficult to determine who and when began measuring national income. Interest in accounting at the national level emerged in the nineteenth century, and in particular, the rapid economic growth during the Industrial Revolution gave rise to interest in measuring the economy.
The Origin of GDP as a Measure of Economic Growth
Although the Industrial Revolution sparked interest in the field, political forces and global economic events ultimately shaped GDP as a metric. During the Great Depression, British economist Colin Clark and his American colleague Simon Kuznets began measuring national income. Kuznets' calculations showed a double-digit decline in the economy in 1932 compared to 1929. President Roosevelt cited these figures when announcing the economic recovery program. Although Kuznets is credited with generating the first national income accounts, they do not reflect the method he intended to use.
He wanted to create a measure of wealth, not production. He believed that advertising, the financial industry, speculative activities, and certain types of expensive urban housing, among other things, including government spending, should be excluded. However, if the output generated by private companies were subsequently redistributed by the government, this would mean an economic downturn. The U.S. Office of Price Administration, established in 1941, found that a recommendation to increase government spending the following year was rejected on this basis.
Therefore, from its inception, GDP has been defined for political reasons – to serve an interventionist, Keynesian ideology. Since the definition of “national income” is formed by economists, what constitutes “income” is determined based on the intellectual climate along with political needs.
Methodological changes with political goals
The availability of national income statistics makes its management not only feasible but also scientific. The new scientific status of both GDP and Keynesian economics encourages the widespread use and improvement of national accounting. The UN, IMF and World Bank use GDP to determine the need for aid. As GDP becomes the standard indicator of development, it is not surprising that many developing countries oppose attempts to improve GDP for political reasons, because this way they will not be eligible for aid. Here are some of the most striking methodological changes in GDP calculations and their consequences - Ghana's GDP on the night of November 5-6, 2010 increased by 60%. The reason: the country's statistical agency updated the weight used in calculating the price index for the first time since 1993. After such adjustments, Nigeria added 89% to GDP in 2014, and Kenya added 25%.
These methodological changes to previous GDP calculations can be the source of major political and economic events. For example, the 1976 crisis in the United Kingdom - the Chancellor of the Exchequer Denis Haley requested an emergency loan from the IMF. However, when revising the GDP, he stated that if the ministry had had the correct figures, the loan would never have been requested.
One of the most important shortcomings of GDP is its inability to account for innovation. Increases or decreases in prices often do not equal changes in the quality of the product. Some product prices increase, and GDP increases as a result, but the quality of these products increases faster than their prices. Conversely, some prices fall while quality increases exponentially. The discrepancies in GDP as a result of innovation are likely to be significant. For example, software, television, and other information goods have accounted for 4% of GDP over the past 25 years, while Google searches are estimated to generate about $150 billion annually.
Economists of the "Austrian" school have been criticizing the increase in government spending for a long time and how it can very well stimulate the economy and increase GDP, but this is at the expense of misinvestment. When it comes to GDP, more credit equals more growth. The current GDP methodology encourages malinvestment by government support for creditors.
Regardless of whether GDP is the best measure we currently have, that is far from a reason to continue using it.
