In the economy by its price in GDP.

In December 1999, the U.S. Department of
Commerce named the development of gross domestic product as “its achievement of
the century” (Berry, 1999). Gross domestic product, as known as GDP, is
measured by the national income and product accounts which are used to keep
track of what is happening in American economy. It was first presided over by
William Fitzgerald during the Second Anglo-Dutch War and thanks to the tireless
work of economists like Adam Smith, Alfred Marshall, and John Maynard Keynes,
we have today a definition of GDP– monetary value of all the finished goods and services
produced within a country’s border in a specific time period by summing up
consumption, investment, government spending, and net exports (Coyle, 2015). As
one of the most widely used measures of economy, it enables policymakers and
the Federal Reserve to estimate whether the economy is contracting or
expanding, whether the economy needs a boost or a constraint. By using fiscal
and monetary policies, government and the Fed can keep the business cycle stabilized
from recession or stagflation. So, the accuracy of GDP data is a crucial point.
With the benefit of hindsight, economists recognized that miscalculation of GDP
leading to inappropriate policies caused an economic crisis, for example, the
stagflation in 1970s and the financial crisis in 2009. Although, GDP data has
been constantly improved over decades, there are still some areas are of great
concern. Vague margin of production, rapid technology improvement and an
increased sense of sustainable development are three reasons for the U.S.’s GDP
miscalculation of the overall economy.

The definition of production is blurred because
it is hard to estimate the value of some products, and also services to the
economy by its price in GDP. One of these products is related to government
spending because what the government produces does not sell on open markets. In
other words, there’s no market price for government products. So, the output of
the government is valued at the cost of production, for example, computing the
benefit of a highway by the salary paid to the workers and the cost of raw
materials. Therefore, if the government spends more, the output increases, and
GDP increases, even when the government spending is inefficient. According to
the Federal Reserve Economic Data, the share of government output in GDP is now
about 17% for the United States (Fred, 2017). Government spending accounts for
a great part in GDP. So, the efficiency of government spending needs to be
measured into GDP. In addition, personal services are another part of the
products and services which are hard to evaluate in GDP. Different from
tangible goods or common services, the benefit of personal services is not
based on its quantity but on the quality of the service. The quality of
personal service is based on human capabilities and skills which are uncountable.
So, a single number in GDP doesn’t show how the quality of personal services.
Further, the self-produced products do not find their way into GDP calculation.
In other words, some things were produced by people that they once paid for, but,
are no longer calculated in GDP. For example, a man who marries his maid will
decrease GDP. As long as she is a maid, her salary will be a component of GDP.
But the moment, he marries her, she becomes a housewife and hence her income is
not a part of GDP. So, the marriage negatively impacts GDP, but, the overall
economy has no effect (Binali, 2015). Housewives’ services are produced but
they are not sold, which means that a large amount of output is produced by
people at home and requires a better handle on GDP data. GDP is a number to measure
the overall production in an economy, but, behind the number, efficiency;
capability; and self-sufficiency are also important to measure an economy.

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GDP can hardly capture the price of the
goods associated with technical innovation in the economy. The first reason is
that when a new technology emerges, people tend to change their consumption
ways, but, it will not immediately show on the weight of GDP. As the Nobel
laureate economist Robert Solow noted
in 1987, computers are “everywhere but in
the productivity statistics” (Triplett, 1999). In 1980s, personal computer
became popular to individuals and companies. However, it didn’t show any data
on GDP. This is due to fact that the Bureau of Economic Analysis revises all
its calculations every ten years based on the U.S. Census (“Methodology Papers”).
Within ten years, a computer makes itself from nothing to everything. The spreading
of technology has changed the weight of economic structure, but, GDP can hardly
keep pace with it. Second, technology has brought in higher efficiency along
with many free services. These free services added value to the economy. Listening
to music, booking a hotel and shopping for products are all free on-line. Compared
to the past, people can accomplish much more in shorter time frames with fewer
resources. In modern economy, people focus more on resultant productivity gain and
most of the things which enhance the efficiency, are free to the consumers. So,
these free services have added their value to economy, but, not captured by
GDP. Another reason is that the change of prices showing innovation and quality
improvement are always blended with inflation. If the rise in the price
reflects the improvement in quality only, then the inflation index will
overestimate inflation and underestimate real GDP. Economic historian Brad
Delong states that the price of one lumen or unit of light has dropped
significantly in 20th century. Meanwhile, the lighting quality has
marked improvement. However, the original data of purchasing candles, bulbs and
lamps in GDP has never shown the prices decreased or quality improved (Coyle,
2015). So, GDP is a measure for price but it can’t measure the quality changes
contributing to the price. Technology progress can soon pervade the world with
products’ quality increased, production efficiency improved, production cost decreased,
and eventually, overall economy growth. However, these changes won’t be
recognized in statistics of GDP until much later.

Development that meets the needs of the
present without compromising the ability of future generations to meet their
own can benefit long future but shows on GDP in recent time. One of the
sustainable developments is the positive attitude towards exploitation of
natural resources. For example, instead of spending all of the investment into
over-exploitation, a company diverted some of the funds doing research and
development in new energy and adding value to natural resources. Although, the
amount of money in investment doesn’t change, the revenue will decrease because
the research and development will not produce results immediately (Rebeca,
2012). So, the investment portion in GDP overestimates the real GDP. The
overall economy is not yet better off than the data shows. Another sustainable
development may miscalculate the GDP is pollution abatement. Government
spending will be increased by applying pollution abatement policies because
more employees are needed to regulate and operate the policies. This spending
will not benefit people nowadays, but it is shown in GDP as a growth. Additionally,
new policies will increase the cost of polluting enterprises and decrease their
profit. Under this circumstance, the data in GDP is overestimating the overall
economy. Individuals can also pursue a sustainable development in education.
Instead of finding a job after graduation from college, people can further
their education in order to have a better salary in the future by attending to
graduate school. In GDP data, economy is better off because of the tuition fee
paid to the school. However, in overall economy, people do not benefit from
paying their tuition fees because they won’t find a job immediately after joining
the school. With the increased sense of sustainable development, people, companies
and the government would like to invest their money to the long future
benefits. These investments will be shown on GDP data immediately, even though,
it will take a long time to be realized in overall economy.

In conclusion, there are many products
and services that will cause miscalculation of GDP because their value is hard
to define, for example government spending, personal services and self-produced
products. Also, the improvement of technology can change the world economic
structure so quickly that GDP fails to keep up with it. Finally, because of the
increased sense of sustainable development, GDP, like a young boy, is impatient
to show future benefits in current time. So, for the policymakers and
economists, understanding which part of the GDP is overestimated and which is
underestimated is the key to the future thriving and prosperity.