New insights into GDP

A new book “The Growth Delusion” by David Pilling, a Financial Times journalist, provides interesting insights into our obsession with economic growth and how we measure it. This blog highlights only some of his key points which are relevant to A’level and IB economics. The book is definitely worth a read. Modern GDP statistics (“the value of goods and services produced in a given period”)  have their origin in the USA around the 1930s with the work of Kuznets, who produced the first national income data to see the impact of the Great Depression on the US economy. They became more important during the Second World War when the UK government, prompted by Keynes, and the US government needed to be able to manage the war effort to maximum effect while still providing enough resources for consumption.

Pilling points out the many failings of GDP as an economic indicator such as the way it takes no account of what is produced, merely its value. Thus he points out that  wars can be good for GDP if they involve countries producing more tanks, weapons and aircraft. Similarly, two forks are, in GDP terms, as useful as a knife and fork, but less useful in reality when trying to spread jam on toast or cut one’s steak.  He is also scathing about the use of averages and points out that while a rich country might have a high average GDP, and therefore, according to economists, a high standard of living, if this is held by a very small number of people, the standard of living of the majority might be below that of a country with a lower average of GDP.

Measurement of GDP is difficult since it is impossible to measure every transaction and therefore relies on surveys e.g. the Living Costs and Food Survey for about 5,000 households and monthly surveys of approximately 45,000 businesses. The development of technology has made the measurement of GDP more difficult. The UK Government set up an inquiry under Charlie Bean – OB and former Deputy Governor of the Bank of England – who made comments similar to those expressed by David Pilling in terms of activities which are now much harder to measure and value such as using Google Maps rather than buying a paper OS map or streaming films rather than buying or renting DVDs. Another problem is that many things have become cheaper and better – my new recorder is easier to use and records more than a previous DVD recorder  but, in GDP terms, it is less valuable because it is cheaper.

There have been many debates over what should be included in GDP and although these might seem largely irrelevant, they matter when trying to compare countries’ GDP. In the past certain things, such as the sale of cannabis in cafes in Holland were legal and therefore recorded while a similar purchase in Romford would not be counted. However Eurostat wanted consistency among its members and decided that all transactions for goods or services involving money were to be recorded, whether they legal, illegal, good or bad. Therefore, in a purely numerical way, those who argue in favour of increasing GDP as being a key government objective, could argue that encouraging the sale of drugs or prostitution is as valid as increased spending on education or health – something even an economist would find hard to justify! More relevantly sales of guns in the UK  are part of the shadow economy but in the US they are legal, widespread and contribute to their GDP.

Pilling also considers the problems of measuring GDP in developing countries where a significant percentage of production takes place in the shadow economy; for example in Zimbabwe only 6% of the is formally employed. Similarly, my purchase of bottled water from Waitrose  is counted in the UK’s GDP, but the effort of a African villager who spends hours walking to and from a stream or well to collect “free” water has no value according to GDP statistics. He describes the way lights at night are used to indicate economic activity in different areas with increases in intensity over time indicating growth. Such methods indicate that the proportion of economic activity occurring in villages, and not always measured, is more significant than thought and therefore the GDP of many developing countries is, similarly, larger than previously calculated.


Book review: End the Depression Now! by Paul Krugman

Book review ‘End This Depression Now.’

Gloria Ma

‘End This Depression Now’ by Paul Krugman focuses on analysing the causes and consequences of 2008 Economic Crisis, in order to outline numbers of methods to avoid future depressions.

Throughout the book, Krugman is very much like an existentialist who urges the responsible agents to act spontaneously towards changes in policies making and economic forecast. As he quotes from Keynes: “The long run is a misleading guide to current affairs. In the long we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.” Hence, Krugman argues that all the economic crisis are avoidable as the economists can proactively make adaptations over time periods. Taking the example of Brexit, “the boom, not the slump, is the time for austerity”, a cut in interest rate and cooperation tax are authentic policies to impose in the U.K. economy – they not only boost the consumer and business confidence but also directly increase consumption and investment to maintain a sound economics growth rate.

The most captivating, or precisely the most admirable part of this book is that Krugman has a visionary prediction of the world politics now: a global lean towards nationalism (extremism) – such as Brexit, Trump’s presidency and the coming up French general election Round 2 – this phenomenon can be simply interpreted by economic factors. It is obvious that Krugman stands aside with the Keynesians, however, this might inevitably set the width of the book rather narrow.
Although Krugman has listed lots of adequate arguments, it is always interesting to hear other monetarists’ solutions upon economic crises.

Overall, I have learnt a great deal from this book, not merely the economists’ theories, and also the responsibilities that rule-setters have to act on. No depressions can indicate the end of the world, there are always solutions and ways to limit the harms.

Book review ‘Economic Naturalist’

‘The Economic Naturalist: Why Economics explains almost everything’, by Robert H Frank (Professor of Management and Economics at Cornell University.) is a book which can be comprehended by people who does not study economics as an academic subject because it contains lots of interesting practical problems. Moreover, the narrative style of interpretation enables the reader to connect them with real life situation rather than unnecessary diagrams or professional terminologies.

The most engaging part of the book is that some of the phenomena really raised my curiosity to find out the economic theories behind it. As demonstrated by the front cover of this book – Why is milk sold in rectangular containers, while are soft drinks are sold in cylindrical ones? In the beginning, I did not regard it as something links with economics as it appears rather friendly than those we read in the textbooks. However, the reason behind it not only linked with economics but also psychology, history and practical experiences – the answer is for you to find out from reading the fascinating book.

Alternatively, Frank can be vague about his explanations of economic phenomenon. As demonstrated in his example of drive-up cashpoint machines that have Braille dots, some readers argue that the reason behind it is the regulation rather than opportunity cost. Despite a brief explanation, Frank does not attempt to add these alternative reasons into account. I think an economic phenomenon requires a variety of reasons to be fully established.

Overall I rate this book as 4 / 5 because after reading this book, economics is not something that is on the moon for me anymore, it illustrates a rational dimension approaching human behaviour.