Everyone uses GDP – Gross Domestic Product – numbers to boast or compare the performances of nations. But here are some problems with that.

GDP is an aggregate measure and doesn’t show inequality: If Bill Gates walked into a bar, suddenly the “average” bank balance of people in the bar would skyrocket, even though nobody got richer. Similarly, GDP is an aggregate number and doesn’t show how many poor people there are and what the wealth distribution is. The US GDP per capita is $60,000, but 80% of all American workers makes less than that amount. GDP won’t tell you that 45 million people are on food stamps, and so on.

GDP is about spending and doesn’t reflect the wealth: How much the country spends is NOT a true reflection of its wealth or finances. GDP won’t tell you how much money Americans have in the bank.

GDP is often boosted by debt: In a true economy, countries increase their GDP by producing real stuff. Now, everyone just borrows and spends, but voila the GDP goes up. So our national debt is $20 trillion, household debt is $13 trillion, corporate debt is $8 trillion, student loans are $1.5 trillion, credit card debt is about $1 trillion … but none of that is reflected in GDP. You might think that a guy with a BMW is rich, but maybe he’s just buried in debt up to his neck.

GDP doesn’t reflect the quality of the economy: GDP doesn’t care what people spend their money on. If a guy spends $1000 on opioid drugs, the GDP goes up by $1000; if he then passes out, and Medicare spends $20,000 to save his life in the emergency room at a hospital … the GDP will go up by $20,000. There are lots of wasteful, fraudulent and unnecessary activities in our economy, but GDP doesn’t care!

Similarly, Wall Street shenanigans make the GDP go up even though nothing productive comes out of buying and selling stocks and rigging the stock market. In a broader view, the financial sector – finance, insurance and real estate – account for 20% of the US GDP.

GDP numbers can be totally wrong!: GDP numbers get revised all the time, sometime wildly. For example, look at the chart below for GDP growth in Q1 2015. It’s as if the economists have no idea what the heck they’re talking about!

Conclusion: Perhaps some economists can come up with a new, more accurate measure called GWP – Gross Wealth Product.

P.S. On a related note, while comparing GDP or GDP-per-capita of nations, it’s wise to use what is known as PPP GDP or PPP GDP per capita. PPP stands for Purchasing Power Parity. This is because, for example, $100 in the US will get you far less than $100 in China. Thus, while the nominal US GDP is larger than that of China, when you compare PPP GDP’s, China’s economy is actually larger than the US.

 

Author: Chris Kanthan

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