GDP — What’s In, What’s Not, And A Defence Of Its Quiet Builders

Recently, there has been recognition of efforts “re-establishing the credibility of India’s foremost economic indicator, GDP”. This is indeed heartening for all the people who selflessly soil their hands to ensure that the productive output of the economy is measured. The ‘much maligned’ Union Ministry of Statistics and Programme Implementation (MoSPI) has refreshingly been commended for releasing various pending surveys, engaging data users through public seminars and sensitising them to the changes they can look forward to in the upcoming new series on national accounts. 

Building the broadest understanding of what is measured has always been the endeavour of this tribe, right from the 1930s when the British economist and statistician Colin Clark and the American economist Simon Kuznets developed the concept of GDP as we know it today. It was adopted as the main measure of a country’s economy at the Bretton Woods conference of 1944, which spawned the World Bank and the International Monetary Fund. 

Yet, public releases of GDP trigger a wide range of responses, ranging from the dour clinical to the excitably fervid. Gross Domestic Product (and its cousin, Gross National Product, which is GDP plus net incomes earned by residents abroad) as defined by a neutral source—the Encyclopaedia Britannica—is the monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country. In this form, it is used as a broad metric of economic performance and how one economy stacks up in the comity of nations. Up to this point, there is a glimmer of light, but thereafter, heat and dust are stirred up by scrutiny of three types: technical, progressionary, and emotional. 

The first category raises questions like: should government expenditure be included, or excluded, as recently tweeted by Elon Musk? What about goods and services that are not exchanged in markets but are still valuable like looking after children or doing household chores? In this context is the famous quip that if one employs a house help, it adds to GDP; but if one marries the house help, it subtracts from GDP! What about rents that are imagined to be paid by people to themselves because they live in houses they own? And other such imputations? 

A large component of GDP in modern economies is financial intermediation services indirectly measured or FISIM. It is measured by the spread between buying and selling prices (or between the cost of funds and the price of loans in the case of credit institutions). But that inherently includes speculation; in times when financial markets are highly turbulent and volatile, speculation can technically become the biggest contributor to GDP. 

Beyond Output
Driving the second set of reactions is the question: does GDP tell us anything, or how much does it reveal about economic progress? After all, economic growth is also a process of continuous innovation, which contributes to GDP by enhancing productivity. This is addressed very readably in books by the British economist and journalist Diane Coyle. Technological progress has been truly remarkable. She cites the examples of innovations in biomedicine, personalised cell and gene therapy, mRNA-based vaccines and the new generation of weight loss drugs that enable people to live healthier, longer and thereby improve the quality of life. 

Other examples are digitalisation, including generative artificial intelligence, and cloud computing, which allow us to time travel. By restructuring production processes, they can extract hitherto intangible values. Fuel efficiency in cars and the gig economy are other instances of our lives getting better with progress. Yet another set of innovations is reducing the use of materials and, in fact, making GDP lighter and eco-friendly. Chips and semiconductors are prominent examples. Computational power is growing hand in hand with energy efficiency. The issue is how to crystallise these innovations in GDP and other economic statistics, by capturing their power to increase productivity. 

The third set of reactions seeks clues in GDP about the quest for bliss. 

In a speech delivered in 1968, US Senator Robert Kennedy lamented that “GNP counts pollution and cigarette advertising... special locks for our doors and jails for the people who break them, …but it does not include the health of children,…the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.” Is the answer: redefine GDP?

We need better measures of economic output, undoubtedly. Reforms in the United Nations’ System of National Accounts, which for economic statisticians is the Scripture, are widely criticised as incremental and seriously lagging human progress. 

But our producers of economic statistics, like GDP, are driven and determined. Eventually, they will catch up, but they will remain focused, as they should be, on the measurement of economic output, not the quality of our living or the pursuit of happiness, until they are reflected in the money value of final goods and services produced and rendered. 

The measurement of productivity is a subject which sits uneasily on the plates of economists and statisticians. Those of them who pack growth accounting frameworks in their holsters can at best measure productivity as a residual after their best efforts at cleaning out the contributions of capital, labour, energy, materials and services—the celebrated KLEMS framework—from GDP.  

Statistics essentially measure uncertainty. In a vast ocean of unknowns, organisations like the MoSPI are battling formidable odds.

The least we can do is back them in doing what they do best, bring to them our fingers to the wound when they engage with us data users and civil society, and repose confidence in their output. That will set them free to boldly go where only they can go, and then turn around to hold up to us a mirror — GDP.