24 Aug 2018
Gross domestic product is our chief measurement of economic health. But GDP is failing to account for the dynamics of modern economies – and some experts are calling for reform.
GDP: a wealth of meaning is crammed into those three letters. Gross domestic product is our principal index of economic welfare. It is the subject of conferences and hand-wringing editorials. It is the metric by which the success or failure of government policy is judged.
Such is the ubiquity of GDP in public life, it is easy to forget it is not a naturally-occurring phenomenon but a human invention, like chocolate cake or the internal combustion engine. And like an old car trundling along the motorway, GDP is struggling to keep pace with the demands of the modern world.
As investment shifts towards service sectors and digital assets, GDP is failing to provide an accurate picture of how economies are performing. It does not account for the distribution of economic gains, which might explain why Western governments failed to anticipate the populist votes of recent years. So is it time for GDP to be replaced? Or does it remain an indispensable tool, despite its flaws?
“If you are trying to value spending and income, GDP remains the most relevant statistic. But it is not perfect,” says Stewart Robertson, senior economist for the UK and Europe at Aviva Investors. “It is quite easy to measure the number of widgets coming out of a factory, but quantifying the economic value being produced by digital and creative industries is much more difficult. In an economy that is evolving in these directions, it is legitimate to ask whether GDP is still fit for purpose.”