GDP: the most quoted economic statistic. What does it mean to a citizen?

Gross Domestic Product (GDP) is the most quoted economic statistic by politicians and the media. GDP up as expected, we have strong growth, GDP less than expected and its weak growth, but GDP negative and, just like inflation, it’s the evil of all evils. Let us question the conventional wisdom of GDP.

What is the GDP statistic, what does it mean, and should it drive major economic decisions? How do changes in Money affect GDP?

The following is a summary of an academic definition of what the GDP statistic is:

GDP considers the total value of goods and services produced by various sectors of the economy, including agriculture, manufacturing, construction, services and government. It encompasses both private and public consumption, investment, government spending, and net exports (exports minus imports). GDP can be calculated using three different approaches: 1. Expenditure 2. Income 3. Production.

GDP is usually reported by the expenditure approach and in nominal terms, reflecting the current prices of goods and services.

GDP is a relevant statistic that is trying to measure how the economy is reportedly performing for the benefit or cost to citizens. Does GDP do the job that should be expected of the most quoted economic statistics? Government treasurers and politicians love to pat themselves on the back when announcing positive GDP numbers, but is this warranted?  I’d love to give a straight answer, but yes, no, maybe, is not straight. There are some important practical and Money factors that need to be accounted for.

GDP per head of population is more relevant than aggregate GDP, if the measure is meant to represent the benefits or cost to citizens and a country has an expansive immigration program.

We’ve covered the situations where immigration can be beneficial, as opposed to the cost of immigration in certain circumstances that can turn immigration into a negative for resident citizens. A certainty is where GDP growth per head of population is negative because nominal GDP is less than population growth,  therefore creating a cost to citizens. At the very least GDP per head should be a highly quoted statistic and not just aggregate nominal GDP.

Many readers may be familiar with the ‘broken window’ effect on GDP when GDP increases when a broken window is fixed. Now let’s take that to the next level and call it the Ukrainian syndrome. When the war ends with Russia, the people of Ukraine will have a GDP bonanza as they slave away rebuilding many parts of their destroyed country. Destruction and the cost of losing useful productive assets is not accounted for in a country’s GDP. So the context of creating expenditure that added to GDP also needs to be accounted for.

Now let’s get to the interesting factors not accounted for in GDP. GDP takes no account of where the Money came from that was expended on the goods and services. Whether Money was borrowed for the expenditure and what the Money was borrowed for is not considered. The GDP economic measurement assumes that all borrowing is the same and is not differentiated from Money circulation. GDP is about the Money expenditure, and not about the quality of where the Money came from and its sustainability.

If GDP were to increase because factories or infrastructure were built that improved productivity and the quality of citizens lives, Money would then be created by borrowing from onshore or offshore to build those factories and infrastructure.  GDP would then rise, and the statistic would be a good measure of the economy and the benefits to citizens both immediately and sustainably. Money created for these purposes increases Money value and generates the ability to earn Money to repay the debt. Any government treasurer or politician would be entitled to boast about a rise in GDP in these circumstances. However, this is not the norm in Australia.

Alternatively, the dichotomy is if a country decimated its manufacturing sector but compensated for that by having policies that overtly boosted property prices, thereby creating Money that is spent on goods and services. As well as importing many people to boost demand, plus compensating for an aggregate current account deficit by borrowing offshore to fill the Money hole. Then that country probably will have positive GDP growth for a very long time.  That country is Australia, and Australian treasurers and politicians were basking in the glory of a world record breaking run of positive GDP growth for a long time. Until COVID brought it to an end.

The problem Australia is currently facing is that no one in power wants to change the business model. They point to the positive GDP statistic to continually support the status quo. Even in the face of evidence that points to an unsustainable GDP and Money growth model with an ever-declining standard of living for citizens, especially younger generations, little is being done to move to a GDP growth model that is productive and sustainable.

Politicians can duck their responsibilities by pointing to that grand old economic statistic of GDP to say that growth is up and all is good, when there is clear evidence and statistics to show that it is not. Politicians can persist with the policy of unproductive Money growth and continue to boost the same policies with little effort. No wonder GDP is their go to economic statistic.

This is a serious issue exacerbated by relying incorrectly on an economic statistic, GDP, when few really understand what it means. Growing GDP by borrowing on unproductive asset values from offshore to fund the deficit may create Money to spend in the Australian economy but it is borrowing from the future. It’s reliant on productive future sales of goods and services that either repay debt or allows refinancing of that debt. Borrowing from the future is intergenerational lifestyle transfer from the future to today.

The alternative is that Australia bites the bullet and crunches GDP by crunching asset values and reducing the amount of Money, taking the lifestyle or wealth hit today. This will not be a policy decision willingly made. It will need to be forced upon Australian citizens at some point. In the meantime, GDP will reign supreme, and so to Rule 21:

Rule 21: GDP is the most quoted economic statistic, but it is fallible and does not take account of factors that can drastically change its meaning and disguise the Money effect on citizens. The reasons for changes in GDP and where the Money came from needs to be explained. At the very least GDP per head of population should be the headline statistic.

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 [JW1]Can you explain what this is

 [JWA2]This sentence is way too long