Nov 18, 2015 - 0 Comments - Narratives -

What Gross Domestic Product Fails to Tell Us

Nalan Yırtmaç

We have already discussed the trend of GDP in Turkey in various different entries. Many economists refer to GDP (total annual output produced within a country) as an important indicator of economic progress. But is it really?

First of all, economic growth always inevitably entails externality. An externality is an effect of a market transaction—external to the market transaction itself—that impacts third parties or nature (negatively or positively). Probably, singlemost referred externality in the public debates is pollution. Similarly, noise and congestion can also be thought as externalities of economic growth.

In other words, GDP growth rates in themselves tell us nothing about the quality of that economic growth.  High growth rates may come with high pollution, noise, congestion as well as destruction of nature in general. Focusing solely on the GDP growth rates without taking into such costs of economic growth will be, to say the least, misleading and incomplete.

Another related point is the manner in which GDP growth is financed. For instance, in countries like Turkey where savings are not enough to cover the investment, in other words, when imports are more than exports, it is necessary to borrow from foreign economies and savers. While an economy may be growing fairly rapidly, this growth may fueled by foreign borrowing. This is a condition currently experienced by Turkey.

Furthermore, some final goods and services that are counted in the GDP calculations may actually not necessarily contribute to an increase in the overall quality of life in a society. For instance, while increased production security goods and services (e.g., military goods, public or private policing activities, prisons) may be reflected in larger GDP magnitudes, they may indicate a decline in the overall welfare of that society.

In addition, there are also things that GDP calculation cannot fully include: non-marketed goods and services as well the underground (or informal) economic activities. Non-marketed goods and services include a huge economic hinterland of reproductive activities inside the household.  The sandwich you prepared yourself, even though it is a final good and has an added value in the form of a service, is not included in the GDP calculations.  More critically, GDP calculation fail to account for the enormous amount household labor (according to some calculations equal to the size of GDP itself) performed by women under the gender-biased social structures that prevail in all societies.

Underground (or informal) economic activities, on the other hand, have different facets, ranging from tax evasion to drug trafficking, and the impossibility of accounting for these activities reduces the precision of the GDP as an indicator of even a straightforward aggregation of monetary value of the final goods and services produced in a country over a year.

Another important limitation of GDP as an indicator of social welfare is the fact it tells us nothing about the distribution of income in a given society. For instance, real GDP per capita is only an average figure and as such has to contextualized with other distributional indicators. We will be returning to this topic when will be discussing income inequality, GINI coefficient and Human Development Index.

And finally, the notions of good life are diverse and not limited to social outcomes generated by GDP growth, especially if its destructive effects over nature and other negative externalities in general are taken into account. Why do we submit ourselves to the imperative of increasing economic production, as opposed to enjoying free time? Moreover, were we to live in more equal societies, we wouldn’t need such high rates of growth to satisfy our needs.

Image: Nalan Yırtmaç

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