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When GDP is no longer relevant

by Matthew Smith | 16 Jan 2017

It should come as no real surprise that the old ways of measuring economic activity fall short when it comes to surveying the output of our new and evolving economy, but what other measures are out there?

There aren’t many — that’s the short answer.

While some new ways of measuring economic activity are seeping into the mainstream, they will continue to take a back seat to measurements ingrained in financial modelling such as gross domestic product (GDP).

Indeed, as Tani Shaw, a PhD scholar at University of Technology, Sydney’s Institute for Sustainable Future points out, GDP has been a primary measure of economic growth since 1944.

“It’s in the news regularly and, even though few can define what it means, there is general acceptance that when GDP is growing, things are good,” Shaw notes, in this recent article for The Conversation

However, as the economy continues to change with the evolution of technology, holes are increasingly forming in simplistic formulations of what is economic growth.

GDP measures production only, Shaw contends. It does not capture other influences on economic factors like collapsing fish stocks, increasing obesity and diabetes, or new types of synthetic drugs, she says.

“When people choose to work part-time to have a better work-life balance, GDP actually goes down,” she notes.

Central banks around the world are saying economic growth is static and unlikely to increase significantly in coming years based on traditional modelling, but is that really a reflection of what’s happening?

“This narrow focus distorts our perception of progress. It guides our representatives to focus only on certain things — what is measured — and allows them to ignore what isn’t quantified and regularly reported,” Shaw says.

Indeed, policy makers are aware of the growing disconnect between how productivity is achieved and how it is measured, a point highlighted in this recent InFinance article

The problem remains, though, that there’s currently no better way to measure economic activity than the archaic tools we currently use and have always used.

Shaw points to the United Nations’ Sustainable Development Goals (SDGs) which she describes as a new set of measures which aim to capture a wider range of human experiences and reset our idea of “success”.

This measurement is in its early stages and is far from ubiquitous in the realm of economic modelling, but Shaw reckons it's evolving.

Reflecting the relevance and likely fast-moving nature of economic measurement, The Conversation has created a series on the topic of “the way we measure” which can be found here

Click here for more from InFinance.

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