Gross Domestic Product, which measures the total market value of goods and services produced in an economy in a period of time, is regarded by economists as the single best measure of economic activity. It provides a measure of how well a country is doing relative to other countries and, if adjusted for inflation, i.e. measured in constant prices or real terms, it shows progress over time. When converted into a common currency such as the US dollar, its size reflects a country’s economic power in the world while its PPP (purchasing power parity) value is used to compare living standards between countries. Equally importantly, it provides information which the government can use to manage the economy.
It is measured in three ways – output, income or expenditure in an economy – and, in theory, these should be the same since expenditure on a product determines its monetary value and also generates the incomes of the factors of production involved in its production. The output method involves looking directly at the value of the output of goods and services produced less the inputs used to produce them, plus indirect taxes minus subsidies. The income method considers the income earned by households and businesses in the production of goods and services and the expenditure approach measures spending by households, businesses (investment in capital and stocks of goods) and the government, plus net exports (exports less imports) of goods and services. Government services, such as healthcare or education, which are not paid for directly, are particularly difficult to measure. In the past, the Office for National Statistics has looked at the cost of providing these services; more recently it supplements this by looking directly at outputs such as the number of patients seen.
It is accepted that GDP does not measure the value of activities which are not traded, such as volunteering or services undertaken at home by parents such as childcare or cleaning; it does not directly measure welfare, takes no account of inequality and most recently, concern has been expressed that it does not take into account the depletion of natural resources. Thus, if Brazil increases its logging in the Amazon, its GDP increases through the production of timber, without any corresponding reduction to take account of resources used up. Similarly, ironically, a disaster is good for GDP since it will require re-building of houses, factories, roads, etc, which is counted, while the initial damage is not subtracted. GDP does not adequately take account of improvements in quality, particularly with electrical goods – computers are estimated to be 1,000 times more powerful than 30 years but in real terms are cheaper. It also does not accurately reflect the hidden economy, although since 2014, UK GDP data has included an estimate of the value of illegal drugs and prostitution (£10bn in 2014) in the GDP data.
There has been concern over the accuracy of GDP estimates, which are frequently revised following initial publication as more data becomes available. The UK is similar to other countries in this respect but where the problem becomes important is when the country might be entering a recession, with all the political and economic significance attached to it. The definition itself (two successive quarters of negative growth) is questionable since it suggests an economy shrinking by 0.1% in two successive quarters is in recession and therefore doing badly, while one growing by 0.1% in one quarter and then shrinking by 2% in the next quarter is okay.
15 years ago, only half the adult population had access to the internet. By 2015 only 10% of adults did not have internet access. Today two thirds of adults own a smartphone, a percentage which has more than doubled in nine years. This increase in on-line activities has been one factor behind the increasing discussion of the usefulness of GDP as an economic indicator and the government commissioned Professor Sir Charles Bean to produce a review of government statistics. He noted that, when an economy mainly produced tangible products, measuring GDP was relatively simple. As services became more significant, GDP calculations became more difficult and, in recent years, with the rise of on-line services, such as Spotify and Google, the validity of GDP statistics has become even more doubtful. Previously, for example, if I wanted to go on holiday to Paris, I might buy a map. Today, I will use google maps instead. Although the physical quantity of goods produced has dropped, I receive the same “product” in a different form, but it will not be recorded in GDP data. As Professor Bean writes, “Digital products delivered at a zero price …… are entirely excluded from GDP. ……. The issue is analogous to that posed by public goods provided free of charge at the point of delivery. But, unlike that example, there is not even a protocol that dictates their value is related to the value of inputs used in their creation.” (Page 76, Independent Review of UK Economic Statistics – Professor Sir Charles Bean)
He considers what has been omitted and also looks at the way the digital revolution has made us more productive saving time ( or less productive if you get bored reading this and go off and email friends or buy something on-line) and estimates that the digital economy currently adds approximately 0.5% p.a. to our GDP growth which we are not adequately measuring. Given the current low levels of UK GDP growth, this is a significant adjustment.