WHAT THEY DON’T TEACH YOU IN ECONOMICS: Does Gross Domestic Product (GDP) even matter?

If you’re studying economics, you’ve already been introduced to the concept of GDP. Even if you’re not, you probably know that it plays a pretty big role in policy making. Everyone’s read the headlines “growth up 2.6 per cent”, or heard various politicians promise to boost this figure if elected – in all this fuss, we often fail to ask an important question: Is this even something we should care about?

WHAT IS GDP? GDP measures the amount of goods and services produced within a country over a given period of time (usually a quarter or a year). On the surface, it provides us with a pretty good, if somewhat simplistic, snapshot of a country’s economic health. If the GDP is up, then more stuff is being made, and the country is doing well. If the GDP goes down (or stays the same), then the economy is doing poorly. This becomes problematic when GDP becomes the only measure of a country’s health.

WHAT’S INCLUDED IN GDP? GDP is based on what’s produced within an economy. Anything that’s made and sold adds to this value, even if it’s clearly negative for society. Every time someone buys cigarettes, GDP goes up. Every time someone eats junk food, GDP goes up. Every time someone’s home is burnt down and rebuilt, GDP goes up. It’s pretty clear that none of these are desirable for a society, and yet they cause our GDP to rise.

WHAT ISN’T INCLUDED IN GDP? The economist Alfred Sauvy once wrote, “Marry your cleaning person, and you will make the GDP drop!” What he meant is that by taking a job (house cleaning) and turning it into a domestic duty (homekeeping), the activity disappears from economic measurement. Similarly volunteer work, such as helping a friend move house or spending an evening serving food in a soup kitchen, are not counted toward GDP. These activities unquestionably contribute to the health of a society – but they are not counted in our GDP.

WHY IS THIS IMPORTANT? What we measure is inevitably what we manage, and a policy mix that’s focused on increasing GDP will inevitably value economic growth above other goals (such as the education, health, happiness and well-being of the people inside it).

That is why restructuring the economy to shrink the manufacturing sector and grow the mining sector could appear to make us richer as a nation, when in fact it’s reducing our overall quality of life. It is why the World Bank can celebrate moving people from subsistence farming communities, in which they have no need for money, to urban slums in which they struggle to survive as progress.

WHAT ARE THE ALTERNATIVES? Robert Costanza, an economist at the Australian National University, argues that GDP was never designed to measure national well-being. He contends that “useful measures of progress and well-being must be measures of the degree to which society’s goals (human needs of food, shelter, freedom, participation, trust) are met, rather than measures of the volume of market economic activity, which is only one means to that end”.

How we choose to measure our economy needs to reflect the diversity of issues we care about – health, well-being, happiness and ending inequality. The Human Development Index (HDI), which includes GDP, along with literacy rates, life expectancy, school enrollment and environmental quality, is a good start – but it’s only half the battle. We also need these new measures to take a more prominent place in our economics and in our politics – rather than being treated as inferior “soft measurements”. In short, we need to change the focus of our economics from how we measure the world, to how we want to change it for the better.

Kieran Adair blogs about politics, the media and the economy at www.talkingpoints.net.au