What Can GDP Really Tell Us?
What it tells us
GDP is an exclusive term that has been used to describe the nation’s development in intellectual spaces and debates, but how true is this picture? GDP refers to the nation’s Gross Domestic Product and measures the total value of goods and services produced in a year. There are two types of GDP Calculations – Nominal and PPP (Purchasing Power Parity). Nominal GDP does not include the inflation rates and cost of living and is generally used to compare national economies. PPP is a much better measure of calculating GDP because it shows the real purchasing power of the citizens of a country.
In India, the Central Statistics Office (CSO) works with various federal and state departments and agencies to estimate the Yearly GDP and other statistics. There are three methods of calculating GDP – Income, Expenditure, and Gross Value method. The income method measures the sum of money earned in a year. In contrast, the expenditure method estimates the capital expenditure in a year. The Gross Value Addition (GVA) method includes several sectors and measures their value addition along the supply chain.
Although why do we need to measure GDP? Well, simply because it helps you know about the strength of an economy. Strong GDP growth suggests an increase in manufacturing capacities, a boost in the service sector, and increased agricultural productivity. Employment growth is strong along with the GDP Per capita, which is the total GDP divided by the total population. Higher GDP per capita means that citizens are earning more, leading to improved living standards and public services.
On the contrary, weak or negative GDP growth signals the slowing down of the economy. With unemployment rising, it can easily show that its economy is faltering and about to crumble. GDP Numbers can clearly display the country’s fiscal and monetary policies, spending rates, and tax rates. Improvement is required in these policies to stimulate the economy and increase the GDP growth rate.
What it does not
However, like many indicators, GDP is shrouded in a cloud of negative attributes. For example, many environmentalists disagree with GDP measurement for comparison between countries because it also considers the climate-destroying practices. GDP also ignores the quality of education and health care in the country. GDP also hides the income inequality residing in the country. Even if the GDP of a country is tremendous, if the majority of the income is in the hands of the top few percent of the population, then GDP is of no use because it shadows the plight of the common man. To overcome this, the United Nations Development Programme (UNDP) has come up with the Human Development Index (HDI). The HDI encompasses Life expectancy, quality of education, and Gross National Income per capita. HDI measures the standard of living in a country and is quite separate from the GDP growth rates. Besides these external factors, the GDP also doesn’t take into account the unpaid work being done. Unpaid work refers to household labour. Some economists assume that household work is already factored into the GDP by indirect means. Still, if we ignore that theory for once, we find out that the value of unpaid work ranges from 15-70% of the total GDP.
Another space that is left untouched by GDP is “Big Data”. Big Data refers to the upcoming and established software companies that offer various services that are often overlooked in GDP calculations. GDP conveniently leaves out the impact of innovation along with the expansion of free online services. An increase in specialization and extended production is also misjudged by the GDP statisticians. Although one may argue that innovation takes so long to penetrate into society, it is already taken into account by the time it perforates into society. However, in this era of rapid urbanization, it is difficult to say that innovation is occurring at a measurable rate.
Needless to say, GDP is an indicator of good quality and will always be used to measure a country’s situation. But if we include other economic indicators which measure other important aspects of a country and its economy, we will get a much clearer picture of whether a country is truly developing or not.
