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GDP: a ‘limited’ measure of economic health

GDP: a ‘limited’ measure of economic health

Gross domestic product (GDP) plays an important role for UK government and business but economists argue the figures are based on limited information and go out of date too quickly.

Judging a nation’s health on one number has always been difficult and while there are three different types of GDP calculation – output, expenditure and income - none give a measure of whether citizens are becoming richer or happier.

Simon Ward, chief economist at Henderson, said GDP figures receive too much attention and highlighted many inaccuracies.

‘Initial estimates are based on limited information and often revised significantly, making them an unreliable guide to current economic performance,’ he said.

‘Conceptually, a rise in GDP does not necessarily imply that members of society are becoming richer. For example, GDP growth driven by faster population expansion implies a fall in average income.’

Paul Wharton, economist and managing director at Tacit Investment Management, agreed there were limits to what GDP figures could tell us.

‘GDP, gross national product and net national income are all attempts to put a value on what the economy is producing at a given point in time,’ he added.

‘The problem is that estimating the value-added at each point in the supply chain, accounting for income, or adding up national expenditures, is complex and time consuming. Thus any measure is always an approximation.’

Ward and Wharton noted GDP was being constantly revised within the three-month timeframes from which it is calculated and does not distinguish between useful and worthless activities. In May the Office of National Statistics claimed illegal activities such as prostitution and drug dealing added £10 billion to the UK economy in 2009, figures not included in standard GDP calculations.

Ward also said GDP does not take into effect the negative cost of growth in terms of pollution and diminishing resources.

‘GDP does not distinguish between useful and worthless activities: it would be boosted by a government programme to pay people to smash windows and reglaze them,’ he said. ‘It also ignores resource depletion and the environmental cost of growth.’

Wharton argued that it is not input/output that is important but the direction of travel for the economy, whether it is expanding, contracting or stagnating and there is business investment and profit generation.

‘In this respect, other measures such as business surveys, lead indicators, purchasing manager surveys and company trading statements give investors a much better and coincident perspective on whether the country’s “animal spirits” are alive and kicking,’ he said.

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