Paul Parkinson asks: how relevant are GDP figures to ordinary people?
Gross Domestic Product (GDP) figures appear to be the holy grail for politicians, economists and commentators alike. So much so, that one wonders how relevant they are in reality for ordinary people, especially when the squeeze on living standards seems somewhat divorced from the reported GDP statistics.
In the UK, the Office for National Statistics uses 3 “measures” simultaneously to calculate GDP –
- Output: – the value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government.
- Expenditure: – the value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports.
- Income: – the value of the income generated mostly in terms of profits and wages.
I have little doubt there is sound economic theory underpinning the basis of the above methodology, but I can’t help thinking that there must be some flaws contained therein which may explain why there is so much doom & gloom, despite the fact the UK apparently still has a £1.6 trillion economy, even after the effects of the financial crisis.
Inclusion within GDP calculations, of general government final consumption expenditure (i.e. purchasing of goods and services including compensation of public sector employees) may be justifiable in principle, but I do have my doubts that it should be given “equal weighting” compared to exports-related trade. This is especially the case when government expenditure is equivalent to approximately 50% of GDP and is partly financed by the government taxing its own expenditure and claiming that “taxed tax” as an additional income stream for itself.
There will inevitably be statistical anomalies in such a diverse economy at the UK’s which will render the figures published less than fully reliable. Let’s not overlook the fact that the Output Measure described above uses information on sales collected from just 6,000 companies in manufacturing, 25,000 service sector firms, 5,000 retailers and 10,000 businesses in the construction sector; consequently those figures have to be extrapolated to cover the entirety of their respective sectors.
But statistical anomalies are not enough: there must be something else. To explain my thought processes I want to consider a fictional group of 11 tradespeople who want to build their own homes from scratch in the spare time they have outside their paid employments:
- Adrian the architect,
- Brian the bricklayer,
- Craig the carpenter,
- Eric the electrician,
- Frank the floorer,
- Gary the glazier,
- Paul the painter,
- Percy the plasterer,
- Peter the Plumber,
- Richard the roofer
- Simon the surveyor.
If all 11 enter into “informal” arrangements to help each other to collectively build the 11 properties, by pooling their respective different skills and sharing their physical labour, such activity would not register within the economy’s GDP figures.
Alternatively, if they enter into “formal” agreements to pay each other £10,000 for their respective services, the combined professional invoices amounting to £1 million would count towards GDP data, even though all 11 individuals would be no better off financially than if they had stuck to the above “informal” arrangement of skills & labour swap.
Also, if those 11 tradespeople have no spare income or savings and end up borrowing the £1 million to pay the invoices to each other, that credit provided by the banks would be a separate entry into the GDP total for the economy in addition to the invoiced work.
The “formal” invoice arrangement described above, whilst adding to the output of the economy, is actually a “zero-sum game” for each of the participants, because they end up with the same amount of money they started out with. So the economy could be officially “growing” whilst the financial situation of many individuals remain unchanged at best and deteriorating at worst. The fact that “leverage” (loans) has an incremental effect on GDP figures would suggest, if taken reductio ad absurdum, the economy could be measured as being actually “booming” even if the government + households were up to their eyeballs in debt and all businesses were loss-making despite increased turnover thus using credit to survive.
The conclusion I have to draw is that, for many ordinary people, GDP figures don’t necessarily reflect economic reality.