Fantastic post that really gives you an understanding of the issues involved. As always, it was quite illuminating about issues discussed in the economic literature. That said unless I am misunderstanding you, you seem to have neglected some commonly mentioned problems with GDP like the fact that it doesn’t take note of diminishing marginal utility and doesn’t count things like the direct cost to welfare from crime and other antisocial behaviour and also only values government provided goods at the cost it took to provide them which undervalues relative to the private sector. There are probably other issues that I’m forgetting or haven’t heard about. Although I agree that GDP is still going to be strongly correlated with welfare. Also, some of the issues I bring up maybe non-issues due to considerations I am unaware of.
You are right that these are omitted, besides a passing mention of inequality (which is only a problem with declining marginal utility) and of externalities generally. Government procurement I left out, although this actually tends to reduce welfare and increase GDP. I will cover this in a later article (possibly tomorrow). But they are indeed issues.
government-provided goods and services are both under- and over-valued by GDP, since sometimes the market value is more than cost but other times it is less or even negative
"As far as I know, we do not impute the benefits of lovemaking in the household by consulting the price of prostitutes, although I understand the staff of the BEA to be quite keen on the idea" i cant tell if this is a joke or not
"This also leads to the apparent advantage of Europe in leisure being somewhat illusory. They do more work at home, and their leisure isn’t really leisurely" can you elaborate on this? im wondering if maybe there's a multiple-equilibrium situation where americans buy more labor-saving appliances with the extra income they get from working during the hours those appliances saved
I'm a little confused by your discussion of consumption vs investment. I take your argument to be that the flow of capital services from the truck are an intermediate input. This makes sense to me, but then why put an I between C and G in our famous equation? Is that just cope for inadequate data? Tradition?
Relatedly, one could argue that many durable consumer goods are really an intermediate input to household production of clean dishes, cooked food, etc. Is this handled in any way by household production data?
I think there's something similar going on with medical spending as with investment. A nonzero percent of medical spending just exists to compensate for negative externalities. For example air pollution causing more respiratory disease; the treatment cost is added to the GDP even when it only exists to (imperfectly!) cancel out an earlier negative externality that wasn't counted.
Probably similar logic applies to many industries. Perhaps that's an argument for having GDP count nothing by default, instead of everything by default.
It’s easy to find the flaws with the GDP metric. The most famous being how GDP falls when a widower marries his housekeeper because he no longer has to pay her.
In the end, however, Decker’s conclusion is the same as mine in my essay on this. GDP, for all of its flaws, is a reasonably good measure of economic growth and well-being.
Fantastic post that really gives you an understanding of the issues involved. As always, it was quite illuminating about issues discussed in the economic literature. That said unless I am misunderstanding you, you seem to have neglected some commonly mentioned problems with GDP like the fact that it doesn’t take note of diminishing marginal utility and doesn’t count things like the direct cost to welfare from crime and other antisocial behaviour and also only values government provided goods at the cost it took to provide them which undervalues relative to the private sector. There are probably other issues that I’m forgetting or haven’t heard about. Although I agree that GDP is still going to be strongly correlated with welfare. Also, some of the issues I bring up maybe non-issues due to considerations I am unaware of.
You are right that these are omitted, besides a passing mention of inequality (which is only a problem with declining marginal utility) and of externalities generally. Government procurement I left out, although this actually tends to reduce welfare and increase GDP. I will cover this in a later article (possibly tomorrow). But they are indeed issues.
government-provided goods and services are both under- and over-valued by GDP, since sometimes the market value is more than cost but other times it is less or even negative
"As far as I know, we do not impute the benefits of lovemaking in the household by consulting the price of prostitutes, although I understand the staff of the BEA to be quite keen on the idea" i cant tell if this is a joke or not
"This also leads to the apparent advantage of Europe in leisure being somewhat illusory. They do more work at home, and their leisure isn’t really leisurely" can you elaborate on this? im wondering if maybe there's a multiple-equilibrium situation where americans buy more labor-saving appliances with the extra income they get from working during the hours those appliances saved
I'm a little confused by your discussion of consumption vs investment. I take your argument to be that the flow of capital services from the truck are an intermediate input. This makes sense to me, but then why put an I between C and G in our famous equation? Is that just cope for inadequate data? Tradition?
Relatedly, one could argue that many durable consumer goods are really an intermediate input to household production of clean dishes, cooked food, etc. Is this handled in any way by household production data?
If you think of GDP as a technical metric of what creates jobs, you pretty much have the definition sorted out.
And clearly defined.
Auto production counts, but polar bears in nature, per se, don't even though polar bears are a good thing to have.
GDP is a tool for a narrowly defined purpose. It is not a good metric for "value"
I think there's something similar going on with medical spending as with investment. A nonzero percent of medical spending just exists to compensate for negative externalities. For example air pollution causing more respiratory disease; the treatment cost is added to the GDP even when it only exists to (imperfectly!) cancel out an earlier negative externality that wasn't counted.
Probably similar logic applies to many industries. Perhaps that's an argument for having GDP count nothing by default, instead of everything by default.
I really liked this piece, Nicholas
It’s easy to find the flaws with the GDP metric. The most famous being how GDP falls when a widower marries his housekeeper because he no longer has to pay her.
In the end, however, Decker’s conclusion is the same as mine in my essay on this. GDP, for all of its flaws, is a reasonably good measure of economic growth and well-being.