GDP accounting has raised questions of legitimacy and whether GDP is an accurate measure of growth. Despite its limitations, GDP is continually used as a measure of economic growth in reports and analyses. Structural changes continue to complicate and obscure GDP calculations and interpretations.
It is important to consider the incentives governments face for reporting accurate, up-to-date information. In the case of national GDP, governments can over estimate GDP to paint a misleading picture that the economy is booming. Take for instance, GDP growth in China. China has raised widespread skepticism over its volatile and seemingly inflated GDP growth rate and the possibility that individuals in China gain from falsely reporting estimates remains a concern.
Intentional overestimation is only one of the problems associated with GDP accounting. There are inherent difficulties with measuring standards of living in general, and GDP may not provide sufficient information on a country’s well-being. For example, Denmark had a GDP growth rate just over 1.5 percent in 2014 and has dropped near and below zero since 2012, yet Denmark is ranked in 4th place as having the highest standard of living indicated by the Human Development Index in 2014.
In comparison, China had a GDP growth rate of around 7.6 percent in 2014 and is ranked 90th according to the Human Development Index in 2014.
GDP is calculated by adding the value of goods and services produced in a year and is comprised of consumption, investment, government expenditure, and net exports. Each component can be further broken down: consumption includes services as well as durable goods like cell phones and refrigerators and non-durable goods like food and medication. Investment includes gross private investment which can be broken down into nonresidential investment such as real estate, residential investment such as rented residential property, and changes in firms’ inventories that reflect intermediate goods, raw materials, and various inputs used during production. Net exports are the difference between national imports and exports and are typically trade deficits or trade surpluses.
While current GDP accounting captures measures of consumption, investment, government expenditure, and net exports, there are significant amounts of goods and services not included in GDP calculations. For example, unpaid services and black markets are not captured in GDP calculations but can have a significant impact on societal well-being.
Additionally, GDP typically fails to adjust for innovation and quality which can be an increasing concern given the rise of the sharing economy and reduced transaction costs from web and mobile platforms. Uber is even expected to decrease GDP as it is a more efficient, cost-effective way of utilizing resources and substitutes away from taxi services. Uber experienced rapid growth and in nearly six years surpassed Ford and General Motors in valuation.
Other services such as Airbnb and couch surfing will continue to have a similar effect by escaping GDP calculations. As the sharing economy expands, GDP may become a more misleading estimate of growth. GDP also does not capture changes in variety, which is demonstrated by the simple example that GDP counts a million shoes of the same size and color the same as a million shoes in a variety of sizes and colors. Having variety offers significant insight into economic growth but is absent from GDP.
Given that GDP can be misrepresented, indeterminate of societal wellbeing, and does not adjust for quality, variety, or innovation, does it make sense to use GDP as a measurement of growth? GDP can be a useful approximation of production, but supplemental data such as income, unemployment, life expectancy, or the freedom index should be included to provide a more robust outlook on growth and well-being in comparison to other countries. With a rise in the sharing economy and increased efficiency, it is becoming ever more important to consider revising measurements of GDP and considering alternative measurements of growth.