It’s one of the most important numbers in economics, but is GDP a good measure of our economic recovery?
FOR the first time this year, the UK Office for National Statistics (ONS) will release data on our economic well-being, giving us a better idea of how the recovery has impacted ordinary Britons.
Traditionally, the ONS has focused on the state of the public finances, like debt and borrowing levels, and measured our economic growth in terms of Gross Domestic Ouput (GDP).
These numbers have long dominated the debate over the health of the economy and are the bellwethers by which politicians are often held to account.
But with the ONS now deciding to give “greater prominence” to broader indicators of our economic well-being, could this finally mark the end of the most closely watched statistic in economics – GDP?
What is GDP?
An estimate of the total value of goods and services produced in a country, GDP aims to best capture the true monetary value of our economy.
It is defined by the ONS as “the sum total of the final output an economy produces.”
In Britain, GDP is calculated through a mixture of methods, which include adding up all the money spent, earned and value-added each year.
GDP has long been considered the best aggregate measure of economic activity we have, both in the UK and across the world. It’s also the measure most of us refer to when we talk about an economy growing or contracting.
But with at least one Nobel Prize winning economist lambasting “GDP fetishism”, is it about time we stopped fixating on GDP?
The pitfalls of GDP
Taken on its own, GDP is an incomplete measure of the many facets of our modern economy – a fact that has led the likes of the ONS to give greater attention to different variables of growth and progress.
The most common refrain aimed at GDP is that it tells us little about our overall or individual economic welfare.
For example, headline GDP numbers are often quoted as indicating whether a country is growing and by how much. But should our total output increase at the same rate as our population, there is likely to be no resultant rise in our material well-being.
Although the economy may now be bigger in size than it was in 2008, Britain’s larger population means output is still around 6pc below its pre-crisis peak.
Revisions
Another perennial issue around output statistics is that they are subject to near constant revision.
Earlier this year, changes in the way the ONS calculates economic output revealed that the British economy exited recession nine months earlier than we first thought.
Although significant for economic historians and very good news for the Chancellor, it is questionable whether the revisions had any discernible impact on how individuals felt in the aftermath of the crisis.
It is facts such as these which have now prompted the ONS to take a look at a broader set of indicators that can help up understand what the recovery has really meant for most people.
So what can we use instead?
The ONS has yet to reveal which set of metrics they will be putting out alongside GDP figures to measure our economic well-being, but they are likely to include a number of existing measures that are already part of our national accounts.
It’s also possible to take a closer look at how individual incomes have fared by examining disposable cash at the household level.
According to the ONS, this is a measure which “seems directly relevant to assessment of households’ economic well-being.”
The Telegraph
