Why GDP Doesn’t Tell the Whole Story
Many business executives live by the creed of “What gets measured gets managed.” The metrics we use channel our attention and efforts. And when it comes to global economics, no indicator monopolizes our mindshare more than gross domestic product (GDP). While the measure is useful, it also has some serious shortcomings. Putting too much emphasis on GDP can distort our perceptions of the strengths and weaknesses of an economy.
GDP measures economic activity: in general, the value of final goods and services a country produces in a year. It provides a good picture of the size of the income pie. But focusing on headline GDP growth each quarter leads us to ignore important considerations not captured by income statistics.
For instance, the size of the pie says nothing about how income is distributed. And considering distribution, like overall income growth, is crucial for assessing an economy’s health. This is especially true since incremental dollars are not valued the same by each person. They are worth more to a poor person than to a wealthy one.
Imagine two countries with the same national income. In the first, 40 percent of the country’s income goes to the top 10 percent. In the second, 20 percent does. The latter country has much more income to go around to the vast majority of its citizens, and the aggregate well-being is likely to be higher.
The size of the pie says nothing about how income is distributed.
Even if we made sure to qualify our headline growth figures with distribution and demographics, the discussion would still be limited to income. But there are many other factors worth highlighting to evaluate how we’re doing. Take wealth, for example, which GDP figures tell us nothing about.
Consider two people with equal salaries, but one has a million dollars in the bank and is adding to it, while the other has six thousand dollars in the bank and is spending more than he or she earns. Nations, too, can overspend from savings, but GDP tells us nothing about the size of the stock they have to draw from—it merely measures the income flow. High or fast-growing GDP figures might result from overconsumption, for instance, but this would not bode well for its economic health in the long run.
Our national accounts leave out the value of leisure.
This doesn’t mean GDP is useless. Far from it. But analyzing the contours of GDP does force us to zoom out and understand its limitations. Relying on a single measure as a gauge of a country’s development can force us to overlook dimensions that matter.
I spent an hour or so fiddling with the site myself. The mere act of considering the relative importance of civic engagement and community led me to see the world differently. I encourage you to give it a try as well—it just might let you connect dots that a single metric never could.