Measures of National Income & the limits of GDP
There's more than one way to bake a cake
… and the results certainly won’t be the same
Gross Domestic Product (GDP): market value of output (goods & services) produced within an economy.
Gross Value Added (GVA): GDP minus indirect taxes plus subsidies.
-GDP is a market-price measure and so masks the impact of indirect taxes and subsidies.
-Indirect taxes make market prices higher than their otherwise costs of production.
-Subsidies make market prices lower than their otherwise costs of production.
-Adding subsidies and removing indirect taxes may provide better idea of true costs of production.
Gross National Product (GNP): GDP; plus factor incomes received internationally; minus factor incomes paid internationally
-where factor income is income received on factors of production.
-a lengthier version of this definiton might read: GDP; plus factor incomes received by domestic residents on factors of production they own abroad; minus factor incomes paid abroad to residents of other countries on factors of production they own domestically.
Some problems with GDP:
Comparison: unadjusted for inflation and currency, nominal GDP makes for poor comparisons across space and time.
Per-capita complacency: dividing GDP by population is sometimes seen as a leveller for comparisons across time and space. It is certainly not a useless metric; however, does mask detail. Take a room filled with just two people: one with a net worth of $100 billion, and the other with a net worth of $0. The net-worth, per-capita, in that room is $50 billion.
Understates black-market and domestic economies: GDP is a measure of output, but it is tricky to assign market values to hidden activities. Domestic economies refers to unpaid tasks: chores, DIY, favours for friends, etc.
Masks quality of goods and nature of spending: as a market-price metric, assumptions of quality have to be read-into GDP or inferred therefrom.
-high government spending, for instance, may be the product of either an authoritarian state expanding oppressive networks of surveillance; or an egalitarian one spending heavily upon welfare. Both will raise GDP.
-one country may produce and spend $1bn on paper bathtubs; another may spend $1bn on manufacturing equipment which allows for future doubling of ceramic bathtub output. In this year, at least, the impact upon GDP would be commensurate. The long-run benefits would presumably differ vastly.
GDP sometimes struggles with detail, quality, and questions of wellbeing.
Quality-of-life measures attempt to right this. The UN’s Human Development Index throws life expectancy, amongst other metrics, into the mix alongside per-capita income. In the U.S. , the National Opinion Research Center has run its General Social Survey since 1972: and they’d like to know whether you are ‘happy’, ‘pretty happy’, or ‘not too happy’ - granted you’re an American that is.
Such qualitative measures are not without their own problems; subjectivity front and centre. Is my happiness the same as your own? How happy is pretty?
GDP endures as a measure of economic performance, and there is certainly something to be said for its simple objectivity.