What GDP Conveys

What is GDP (Gross Domestic Product) and why does it matter? Pranay Kotasthane tries to answer that in Missing in Action. Until the Great Depression in the US in the 1920’s and 30’s, governments didn’t bother about it. But the magnitude of the economic catastrophe forced governments to act. But without data, how could they know the right measures or the areas in which actions were needed?

 

Therefore, the US started to create mechanisms to keep track of the “health” of the overall economy. This need only increased during World War II as the US needed to balance spending on war expenses with domestic needs. Thus, by the end of World War II, the idea of GDP as the metric of economic status and its use in helping decide government actions – where/when to step in, which sectors were doing well or poorly – was widely accepted.

 

GDP has many failings. Growth in GDP doesn’t indicate “quality of growth” – was the growth because of war? Polluting industries? Eco-friendly activities? It doesn’t include aspects like happiness, health and education levels. It doesn’t convey whether inequality is rising or reducing.

 

But GDP numbers do convey other things. At a regular frequency. It provides some basis for decisions on where to step in or sectors to prioritize. As a standardized “unit”, it can be used to compare growth rates of different countries.

 

Kotasthane sums it up perfectly when he says:

“GDP measure is like a report card of a kid at school.”

You’d be right in saying the report card doesn’t measure real knowledge. Or potential. Or future success. Or that it gives too much importance to tests.

“But you can’t dispute it measures something important that gives you a sense of the child’s progress. Not having that measure would make things worse. GDP is somewhat like that.”