Final Word

The gross misnomer called ‘Gross Domestic Product’

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‘Gross Domestic Product’ (GDP) as the dominant measure of the success, or failure, of a given country’s economy, has become one of the biggest misnomers of our time.

There is quite a debate, going on for some time now, as to precisely what GDP exactly means, and which economic statistics and/or factors deliver real GDP. But, the most common definition gives it as “the monetary value of all the finished goods and services produced within a country's borders in a specific time period.”

How the profits made on speculative transactions with things like national currencies, or even commodities like oil, gold, maize, etc. of which neither buyers nor seller most often never take physical possession of, and the profits only exist on paper – or nowadays on an electronic ‘cloud’ with no physical address anywhere in the universe – can called a ‘product, is beyond the comprehension of this observer.

I fail to see how and where in this, what looks like a make-believe world, any real, tangible value is added – especially to the life of the ordinary man in the street, or on the dusty plain where his or her “pondokkie” stands.

Al that has happened, is that all those figures launched from computer keyboards to a “cloud,” which has nothing to do with rain, has made the “mieliepap” in his or her bowl more, or very infrequently less, expensive than it was yesterday or the week before.

But then, who said economics is always as exact science.

Where it started

Created in the wake of the so-called “Great Depression,” more than 80 years ago – some sources putting it at 1934, and others at 1937 – by an American from a Russians’ idea, it comes from a totally different technological era. It was also a time of fairly clear dividing lines between national economies and a less clear international economy.

The concept “global economy” did not even exist yet.

The term GDP, according to Investopedia, came into use in 1937 in a report to the US Congress in response to the Great Depression after Russian economist Simon Kuznets, conceived the system of measurement.

Before then, at least in the US, the official measurement was Gross National Product (GNP). The Bretton Woods conference of 1944, which created institutions like the World Bank and the International Monetary Fund, changed all that.

After Bretton Woods, GDP was widely adopted by countries as a standard to measure national economic welfare. The US, however, stuck to their GNP as  official measure until 1991, before switching to GDP.

Changes comes thick and fast

Less than a decade after Bretton Woods, in the early 1950s, doubts developed in economists’ and policy makers’ faith in GDP as a gauge of progress internationally and measurement of a nation’s economic failure or success.

A distinction between economic progress and social welfare, for which GDP does not cater, was increasingly drawn. GDP simply does not cater for factors like the health (of individuals and the environment), distribution of income and wealth, inclusive opportunities for all, and the like.

Neither does it cater for fundamental differences from country to country, like population- size and density, or the relativity of cost of living from country to country. Some tinkering of GDP has developed over time in the form of enhancing concepts like GDP per capita, and then purchasing power parity. Some look at comparison in term of  what is sometimes called by names like “the beer index” – how long do I have to work to be able to buy my first bear, or home for that matter.

Considering that these factors can at times, even dramatically, differ from region to region even inside the same county, or from city to city, – like Polokwane and Cape Town – it is small wonder that GDP became a pretty blunt and vague instrument, far removed from the average man or woman’s lived reality.

To this can be added the development of the internet in the final decade or two of the previous century and the “global village” and “the internet of things, that followed in its wake.

For instance, where do you factor in what, when calculating the GDP contribution of a business like an online gambling house – its head office based in London, its service centre and online marketing department in Cape Town and its financial centre and main bank accounts in the Cape Verde Ilse?

And, the so-called Fourth Industrial Revolution is just coming into swing right now, which would string and weave the supply- and value chain even further across the globe with little respect for geographical borders.

To boot, GDP-calculations almost solely depend on official statistics and data. It does not account for a wide number of unofficial revenue stream flowing through the economy – those like what is usually called the black market, and the informal job- or trade markets.

Neither does it accommodate the profits earned by the citizens of one country from investments in another country, be it through shareholding or direct capital investment – which in the case of South Africa, with all its political uncertainties, can bequite substantial.

Final word

The use of GDP as an indicator of the of the economic health of a country, and as a gauge of a country's standard of living compared to other countries, has become a total gross misnomer.

by Piet Coetzer

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Final Word

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