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18 NIVESHAK GDP’s origins, relevance FinGyaan FinGyaan & alternatives in today’s world Has GDP as a criterion to measure economy’s progress reached the end of its utility? Today GDP has become the most important measure of progress in macroeconomics and almost every country’s economic policies are designed keeping in mind the GDP targets. Even the debt, expenditure, tax collection etc. are measured as a percentage of GDP. The criticism of GDP started in 1970s due to stagflation in advanced economies and modern problems like increased commuting time or lower happiness levels which are not factored in measuring growth. It is criticized for multiple reasons: one that it doesn’t measure the value created by economic activity but measures only the economic output and second that it doesn’t take into account non-monetary costs like pollution, economic inequality or work life balance. There are also critics of GDP like economists Michael Green who have also Ashay S Dalvi K.J Somaiya Institute of Management Studies proposed alternative methods to measure progress. His organisation created the Social Progress Index for non-economic indicators like medical care and higher education. The present day universal standard definition of GDP has certain assumptions about what to be counted and what not as an economic activity which has market price. Although in mass production economy the amount of goods produced such as steel, cars, machinery etc. can be measured but in today’s advanced economy there are very complicated adjustments made to take into account quality up-gradation of products like technology to measure GDP and as a Dallas Federal Reserve bank report in 1998 put it that GDP was a measure suitable for measuring mass production and falls short of measuring intangible products such as income through goodwill or patent benefits or innovation for NOVEMBER 2014
NIVESHAK 19 Cover FinGyaan Story that matter. Tracing origins of GDP: Basically the concept of measuring economy started in the 17th century by William Petty in England and Wales to ascertain a nation’s capacity to pay taxes & till 18th and 19th century, tax revenue and trade remained the sole objective. However, prior to this, the Arthashastra, written by Chanakya (350 – 283 B.C) for the Mauryan empire, had the genesis for the economic policy of the Mauryan empire. Since the 17th century, right from the industrialisation to the race for the domination of Europe during industrialisation which led to wars among the colonial powers, the countries needed to know the ability of people to pay taxes to finance wars. The need to measure the nation’s economy had risen during the economic depression after the First World War when Simon Kuznets, heading the National Economic Advisory Council, submitted a report in 1934 to US Congress which contained estimates of national economy that made a huge difference to policymaking. It measured the output of all different industries and amount consumed by individuals. Kuznets is hence credited for providing the rough frame work of what we today measure as national income or GDP. The Second World War made the latter more important. So the conventional GDP measure as we know today was developed by economists working under John Maynard Keynes in 1941 after the great depression which emphasised on economic output. Measuring National Income: GDP theoretically can be viewed in three different ways. First is the production approach which adds the “value-added” at each stage of production, where value-added is the total sales subtracted by value of intermediate inputs into the production process. Second one is the expenditure approach adds up the value of purchases made by final users. The third one is the income approach sums the incomes generated by production. The international standard for calculating GDP is contained in the System of National Accounts 1993, compiled by the International Monetary Fund, the European Commission, the Organization for Economic Cooperation and Development, the United Nations, and the World Bank. Real GDP is calculated from nominal GDP by adjusting the inflation in commodities using price deflator. Alternatives to GDP: The alternatives to measure growth in addition to GDP were UK’s Office for National Statistics (ONS) & Australian Bureau of Statistics. UK’s Office for National Statistics (ONS) measures economic well-being by an annual survey. However ONS’s data hasn’t changed much since 2012. Certain important things like friendship, sex, relationships enhance wellbeing but policy making is difficult for these things. Australian Bureau of Statistics includes indicators like income and jobs, quality of the natural and urban environment, work-life balance, health © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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