In December 1999, the U.S. Department ofCommerce named the development of gross domestic product as “its achievement ofthe century” (Berry, 1999). Gross domestic product, as known as GDP, ismeasured by the national income and product accounts which are used to keeptrack of what is happening in American economy. It was first presided over byWilliam Fitzgerald during the Second Anglo-Dutch War and thanks to the tirelesswork 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 servicesproduced within a country’s border in a specific time period by summing upconsumption, investment, government spending, and net exports (Coyle, 2015).
Asone of the most widely used measures of economy, it enables policymakers andthe Federal Reserve to estimate whether the economy is contracting orexpanding, whether the economy needs a boost or a constraint. By using fiscaland monetary policies, government and the Fed can keep the business cycle stabilizedfrom recession or stagflation. So, the accuracy of GDP data is a crucial point.With the benefit of hindsight, economists recognized that miscalculation of GDPleading to inappropriate policies caused an economic crisis, for example, thestagflation in 1970s and the financial crisis in 2009. Although, GDP data hasbeen constantly improved over decades, there are still some areas are of greatconcern. Vague margin of production, rapid technology improvement and anincreased sense of sustainable development are three reasons for the U.S.
‘s GDPmiscalculation of the overall economy.The definition of production is blurred becauseit is hard to estimate the value of some products, and also services to theeconomy by its price in GDP. One of these products is related to governmentspending because what the government produces does not sell on open markets. Inother words, there’s no market price for government products. So, the output ofthe government is valued at the cost of production, for example, computing thebenefit of a highway by the salary paid to the workers and the cost of rawmaterials. Therefore, if the government spends more, the output increases, andGDP increases, even when the government spending is inefficient. According tothe Federal Reserve Economic Data, the share of government output in GDP is nowabout 17% for the United States (Fred, 2017). Government spending accounts fora great part in GDP.
So, the efficiency of government spending needs to bemeasured into GDP. In addition, personal services are another part of theproducts and services which are hard to evaluate in GDP. Different fromtangible goods or common services, the benefit of personal services is notbased on its quantity but on the quality of the service.
The quality ofpersonal 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 willdecrease 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 isnot a part of GDP. So, the marriage negatively impacts GDP, but, the overalleconomy has no effect (Binali, 2015). Housewives’ services are produced butthey are not sold, which means that a large amount of output is produced bypeople at home and requires a better handle on GDP data. GDP is a number to measurethe overall production in an economy, but, behind the number, efficiency;capability; and self-sufficiency are also important to measure an economy.GDP can hardly capture the price of thegoods associated with technical innovation in the economy. The first reason isthat when a new technology emerges, people tend to change their consumptionways, but, it will not immediately show on the weight of GDP. As the Nobellaureate economist Robert Solow notedin 1987, computers are “everywhere but inthe productivity statistics” (Triplett, 1999).
In 1980s, personal computerbecame popular to individuals and companies. However, it didn’t show any dataon GDP. This is due to fact that the Bureau of Economic Analysis revises allits calculations every ten years based on the U.S. Census (“Methodology Papers”).
Within ten years, a computer makes itself from nothing to everything. The spreadingof technology has changed the weight of economic structure, but, GDP can hardlykeep pace with it. Second, technology has brought in higher efficiency alongwith many free services.
These free services added value to the economy. Listeningto music, booking a hotel and shopping for products are all free on-line. Comparedto the past, people can accomplish much more in shorter time frames with fewerresources. In modern economy, people focus more on resultant productivity gain andmost 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 byGDP. Another reason is that the change of prices showing innovation and qualityimprovement are always blended with inflation. If the rise in the pricereflects the improvement in quality only, then the inflation index willoverestimate inflation and underestimate real GDP.
Economic historian BradDelong states that the price of one lumen or unit of light has droppedsignificantly in 20th century. Meanwhile, the lighting quality hasmarked improvement. However, the original data of purchasing candles, bulbs andlamps 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 changescontributing to the price. Technology progress can soon pervade the world withproducts’ quality increased, production efficiency improved, production cost decreased,and eventually, overall economy growth. However, these changes won’t berecognized in statistics of GDP until much later.Development that meets the needs of thepresent without compromising the ability of future generations to meet theirown can benefit long future but shows on GDP in recent time. One of thesustainable developments is the positive attitude towards exploitation ofnatural resources. For example, instead of spending all of the investment intoover-exploitation, a company diverted some of the funds doing research anddevelopment in new energy and adding value to natural resources. Although, theamount of money in investment doesn’t change, the revenue will decrease becausethe research and development will not produce results immediately (Rebeca,2012).
So, the investment portion in GDP overestimates the real GDP. Theoverall economy is not yet better off than the data shows. Another sustainabledevelopment may miscalculate the GDP is pollution abatement. Governmentspending will be increased by applying pollution abatement policies becausemore employees are needed to regulate and operate the policies. This spendingwill 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 theirprofit. Under this circumstance, the data in GDP is overestimating the overalleconomy. Individuals can also pursue a sustainable development in education.
Instead of finding a job after graduation from college, people can furthertheir education in order to have a better salary in the future by attending tograduate school. In GDP data, economy is better off because of the tuition feepaid to the school. However, in overall economy, people do not benefit frompaying their tuition fees because they won’t find a job immediately after joiningthe school. With the increased sense of sustainable development, people, companiesand the government would like to invest their money to the long futurebenefits. 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 productsand services that will cause miscalculation of GDP because their value is hardto define, for example government spending, personal services and self-producedproducts. Also, the improvement of technology can change the world economicstructure so quickly that GDP fails to keep up with it. Finally, because of theincreased sense of sustainable development, GDP, like a young boy, is impatientto show future benefits in current time.
So, for the policymakers andeconomists, understanding which part of the GDP is overestimated and which isunderestimated is the key to the future thriving and prosperity.