GDP and beginners

Financial Times  Has GDP outgrown its use? By David Pilling has an excellent beginners article on the make up and use of GDP that poses questions:

Simon Kuznets, the Belarusian-American economist often credited with inventing GDP in the 1930s, had severe reservations about the concept right from the start. Coyle told me, “He did a lot of the spade work. But conceptually he wanted something different.” Kuznets had been asked by US president Franklin Delano Roosevelt to come up with an accurate picture of a post-crash America that was trapped in seemingly interminable recession. Roosevelt wanted to boost the economy through spending on public works. To justify his actions, he needed more than just snippets of information: freight-car loadings or the length of soup-kitchen lines. Kuznets’ calculations indicated that the economy had halved in size from 1929 to 1932. It was a far more solid basis on which to act.

When it came to data, Kuznets was meticulous. But what, precisely, should be measured? He was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes). Presumably he wouldn’t have been thrilled with the idea that the more heroin consumed and prostitutes visited, the healthier an economy.

Kuznets lost his battle. Modern national income accounts include both arms sales and investment banking services. They don’t distinguish between social “goods” – say, spending on education – and social “bads” (or necessities) – say, gambling, repairing the damage after hurricane Katrina or preventing crime. (Countries without much crime miss out on related economic activity such as security guards and repairing broken windows.) GDP is amoral. It is defined simply as the total monetary value of everything that has been produced in a given period.

The first thing to understand about GDP is that it is a measure of flow, not stock.

Diane Coyle, Economist
‘There is no such entity as GDP out there waiting to be measured.’