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Is GDP a good measure of economic performance?

18/07/2015

Economy is not flow and accumulation of money, but as I see it, it is a flow and accumulation of products. National wealth is agregative accumulation of products and not of money. Only very few countries, like US, Switzerland, United Kingdom and eventually Euro zone, succeeded to make out of their money a product, supplying security, so countries are ready to exchange against it merchandise or services.
I have to add here my definition of product: “Product is everything created by human activity, that can be consumed or accumulated for future consumption, direct or indirect (indirect; means product still in process or tool for usage to produce another product at present or in future). Product can be for self use or transferred to others. Then the tool used for this  transaction of product is money (at least so it is in modern economy).”
I will try to explain this view of mine.

Money is a tool that copies certain parts, even if the most significant part of economy, but not all of it. For example, if someone publishes a new article in her/his blog and teaches or pleases someone, she/he produced a product, and still there will be no exchange of money for it. This part of economy is taking more and more significant part in the modern economy. There is a whole new economic theory explaining this trend by Jeremy Rifkin.
Viz link:
http://www.thezeromarginalcostsociety.com/

If to look at economics of an individual, his economic activity, be it production, consumption or savings,  it copies almost entirely exchange of money. But on national level it is not so. If an individual’s monetary savings was translated by someone else to product, mainly investment product, but sometimes just by using borrowed money to immediate consumption, money will represent one to one this economic activity. Since it is easier to calculate the money volume value than the product volume value, the economic activity is usually represented in form of money. From here comes National income=National product. Still it doesn’t mean that money is the real economic value created.
To prevent double calculation, you will never use in measurement of GDP other tool than money. The result of this is that economic activity, without money exchange, will not be calculated as part of GDP. It also means that when in an economy nothing else changes except decrease of product price, the GDP of such an economy will decrease too, even if the level of wealth has not changed (actually this is what is happening in last years in Japan). Of course there are tools to calculate annual change of GDP in real economic terms, where the price change is neutralized, but in absolute terms the GDP was changed just because of price change of the product. The absurdity of such an accounting system is that when the prices drop due to development of technology, the GDP drops too. Luckily the new technologies create also new paradigm changing products, like mobile phones then smart phones, or new communication systems, that will add to the national accountings new values. Take for example electricity versus phone companies. 20 years ago, these two business activities couldn’t be compared as to their volume share in the GDP. If you can recollect, your personal bills to phone companies compared to electricity companies, you will immediately see the huge change in proportions of this two items in your bills, but also in your life. And this did not happened because you reduced your electricity consumption, in contrary, it grew in absolute terms too. The communication activity grew out of proportion compared to the past. It became a product of different dimension, still much cheaper than before. Who could imagine few years ago, that international phone calls with filming transfer will be possible, and free of charge, through your mobile phone. Even in science fiction movies the speaker had to use phone box for such an opperation. I wonder how is this expressed in the GDP account?

3 Comments
  1. GDP=Federal Spending + Non-federal Spending + Net Exports.

    This definition counts only the money spent and not the outcome. Sometimes negative outcomes are also counted positive. Like global warming, air and water pollution etc. Damage to the environment is not counted and medical care is counted positive and also air and water cleanup. Law enforcement is another. No money is spent on rehabilitation but more prisons are privatized and show good profits.
    USA has had net imports in the last few years which is a bargain for the USA because you are exchanging printed money for useful goods from foreign countries.
    The reduced labor required could have been used to reduce work hours and give more vacation to people but no. Unfortunately, plutocracy which controls the govt produces less employment and more overwork! Plutocracy also has increased student loans and general misery instead of making education totally free. Less educated people means GDP decrease. This is counted positive because private funding of private student loans is highly profitable. Whether they are educated or not is not figured in the GDP.
    Cell phones are a big plus to the economy, however. GDP should include the negative terms which are not counted at present.

    • Agree!!! Junk produced is also part of the GDP. The capacity of US to exchange green papers for merchandise and services is an amazing fact. But what will happen if the Chinese one day decide to stop the game? This brings instabilities to the world economy. The 2008 economic crisis was a direct consequence of this situation.

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