GDP – the indicator we love to hate

By Steve MacFeely (UNCTAD) and Cecilia Tinonin (UN Women)

The adoption in 1953 of the United Nations System of National Accounts also played a profoundly important role in globalizing GDP. Richard Stone, who chaired the first UN Expert Group on the System of National Accounts (SNA), and considered by many to be the father of modern GDP, was awarded the Nobel Prize in Economics in 1984.

Here is our monthly guest column by Dr. Steve MacFeely, currently Head of Statistics and Information at UNCTAD. He will soon join the World Health Organisation, (WHO), as the Director of Data and Analytics, this coming July.

This month he co-authored a piece on the history of GDP, its usefulness and its limitations, and why it is the indicator that “we love to hate”, with Dr. Cecilia Tinonin, statistician at the UN Women, Regional Office for Asia and Pacific.

GDP is a product of the Great Depression and World War II. The economic myopia of the great depression highlighted the need for reliable economic evidence, as governments had no real grasp of what was happening or how to manage the worsening global economic crisis. But while the Great Depression played a central role in the birth of national accounting, it was World War II and Keynesian economics that played the determining role in how GDP was constructed.

Dr. Cecilia Tinonin is currently a statistician at the UN Women, Regional Office for Asia and the Pacific. She represents UN Women at the UN Expert Group on Innovation and Effective Ways to Collect Statistics, and is responsible for developing Women Count’s programme of work on time-use methods to support the implementation of the latest international standards on work and labour statistics. 

In her previous capacities, she served as Project Technical Officer in the Labour Force Methodology Unit of the Department of Statistics - International Labour Organization (ILO). Before joining the ILO, she served as Research Analyst in the Evaluation and Monitoring Unit at UNCTAD, and in the Internal Oversight Service at UNESCO.

Dr. Tinonin holds a Ph.D. in Agricultural Economics and Statistics with distinction from the Department of Statistics - University of Bologna (2011), and held academic visiting positions at the University of Oxford (Oxford Poverty and Human Development Initiative and Centre for Time-Use Research), and at the Jawaharlal Nehru University - New Delhi.

She was awarded a Research Fellowship (2012) – and senior Research Fellowship at the Department of Economics – University of Bologna (2013).

With extensive international field experience, her expertise lies in developing analytical frameworks for empirical inquiry and applying rigorous methodologies in data collection to generate unbiased evidence for decision-making aimed at promoting gender equality.

1. The interpretations and conclusions expressed in this article reflect the views of the authors only and do not necessarily reflect the views of UNCTAD and UN Women.

2. GDP - Gross National Product. In this article, for simplicity, we use GDP, GNP, and SNA interchangeably.

GDP – the indicator we love to hate

By Steve MacFeely (UNCTAD) and Cecilia Tinonin (UN Women)

Gross Domestic Product (GDP) has been described as one of the greatest inventions of the 20th century. It is unquestionably one of the most powerful and influential statistical indicators in history – it is the litmus test of economies everywhere. So much so, it has been labeled the ‘the Zeus of the statistical pantheon’. No other measure has ever had such an impact on our lives. GDP is more than a statistic – it not only measures the economy, but systematically defines it. Nevertheless, it is among the most misunderstood. 

This misunderstanding arises from misinterpretations over the intended measurement objectives of GDP. This apparently simple number is the product of sophisticated conceptual and statistical reasoning. Its apparent simplicity is perhaps where the danger lies. GDP was designed to be, and remains, a pretty comprehensive measure of economic progress. Compilers caution that while GDP is often used as a measure of our wellbeing, it was not designed for this purpose and have warned against this. Yet today, despite these warnings and protests from many of our most eminent economists that GDP it has been adopted as the barometer for our collective success and wellbeing.

Even Stiglitz-Sen-Fitoussi, noted that ‘GDP is not wrong as such, but wrongly used.’ But much debate centres on setting the limits to what is called the ‘production boundary’ i.e. what is included in ‘the economy’ and what it not as well as how to capture negative externalities, such as environmental degradation. Should GDP include unpaid domestic and care work (mainly performed by women) or ‘bads’ like defense spending?

GDP is a product of the Great Depression and World War II. The economic myopia of the great depression highlighted the need for reliable economic evidence, as governments had no real grasp of what was happening or how to manage the worsening global economic crisis. But while the Great Depression played a central role in the birth of national accounting, it was World War II and Keynesian economics that played the determining role in how GDP was constructed. The realities of wartime economics were consistent with the Keynesian theory of government stimulus and placed emphasis on production. Consequently, GDP put the role of the state front and centre as a final, and not just an intermediate, consumer. In other words, Keynes put the G in now familiar identity: GDP = C + I + G + X. For this reason, many consider the second world war to be the actual birth of GDP. 

Following World War II, several developments helped to propagate Gross National Product (GNP) into a globally accepted standard. Reconstruction aid, known as the Marshall Plan was not unconditional - to receive aid, European states had to adhere to a market-oriented model and achieve growth and development targets. The Organization for European Economic Cooperation (OEEC) established to distribute aid and monitor the effectiveness of aid, used GDP as the benchmark measure. This contributed to mainstreaming the idea that GDP and national prosperity are one and the same. The Bretton Woods agreement, that created the IMF and World Bank, also contributed to the international predominance of GDP as did the creation of the UN, where membership fees are determined by member states GDP. 

In time GDP went global as it met the need for a common economic statistical language to support the emerging international community. As the concept of development economics emerged and the UN began to cultivate development policy, many of the early experts came from the OEEC, bringing with them their experiences of the Marshall Plan and GDP. But early development policy also had a strong political component, and GDP was used as a tool in the armory against communism. The cold war played a key role in the propagation of GDP, as it was fought through statistics, designed to demonstrate the superiority of capitalism and its ability to provide prosperity and even happiness. The adoption in 1953 of the United Nations System of National Accounts also played a profoundly important role in globalizing GDP. Richard Stone, who chaired the first UN Expert Group on the System of National Accounts (SNA), and considered by many to be the father of modern GDP, was awarded the Nobel Prize in Economics in 1984.

Although GDP quickly established itself as the leading economic indicator, it has never been universally accepted and has been continually criticized for masking a range of economic and social ills. From the very beginning, there have been contested elements – both in its theoretical construction and application. From the outset, Simon Kuznets, the economist most commonly associated with the creation of GDP, flagged various concerns, not least the inclusion of ‘bads’ like illegal activities, socially harmful industries, defense spending and most government spending. He cautioned that GDP could unwittingly act as a ‘statistical laundry’ concealing inequality and would be an inappropriate measure of well-being. Prophetically he worried that GDP would become one of the most misused and most economic misunderstood indicators. 

Over the years, there have been numerous attempts to replace or complement GDP, especially as a proxy measure for wellbeing. Two of the best-known alternatives include, Bhutan’s famous Gross Happiness Index and the Human Development Index, based on Amartya Sen’s Capabilities Approach, and launched by the United Nations Development Programme. Following the Great Financial Crisis of 2009, there were a growing number of commentators arguing that GDP had outlived its usefulness and that we needed to kick our dependence and develop better measures of economic performance, social progress and sustainable development. GDP, it was argued was a relic of the manufacturing age, but was now showing signs of age, as it struggled to adequately capture services and intangibles. 

Although GDP quickly established itself as the leading economic indicator, it has never been universally accepted and has been continually criticized for masking a range of economic and social ills.

Perhaps the most important, or at least influential development in recent years was the Commission on the Measurement of Economic Performance and Social Progress (better known as the Stiglitz-Sen-Fitoussi Commission) established in 2008 by then president of France Sarkozy, to determine whether a better or more comprehensive measure of economic and social progress could be established. The report Mis-Measuring Our Lives, published in 2010, emphasized the need to decouple GDP from well-being and set out a ‘to do’ list for the SNA development agenda. Arguing that GDP provides an overly optimistic mirage, the authors proposed a shift in emphasis away from production towards well-being, with greater prominence being given to the stock and distribution of income, consumption and wealth. They also highlighted the need to include non-market activities, make adjustments for quality - especially in services, account for environmental damage and depletion and measure both objective and subjective wellbeing. 

What is the problem? GDP has garnered considerable criticism for giving a distorted view of social progress and wellbeing. But the counter argument is that GDP does exactly what it says on the tin – it provides a reliable measure of value added created through the production of goods and services. Even Stiglitz-Sen-Fitoussi, noted that ‘GDP is not wrong as such, but wrongly used.’ But much debate centres on setting the limits to what is called the ‘production boundary’ i.e. what is included in ‘the economy’ and what it not as well as how to capture negative externalities, such as environmental degradation. Should GDP include unpaid domestic and care work (mainly performed by women) or ‘bads’ like defense spending? There is also debate on whether and how to include distributional affects and measures of inequality into the calculation. GDP must also grapple with the tangled web of globalization. Although not a new phenomenon per se, most analysts draw a distinction between historic internationalisation and today’s hyper-globalisation driven by large multi- or trans-national enterprises/corporations (MNEs/TNCs). Digitalisation has facilitated the international trade of services, complexity of global supply and value chains, mobility of intellectual property and intangible assets, and aggressive tax planning in ways that were not possible previously. These activities are extremely difficult to measure and to include in a national accounting system given their transnational nature, raising questions regarding the relevance of traditional economic measures like GDP. Perhaps most important criticism facing GDP is that it encourages deficit spending of our ecological capital, as it makes no adjustments for unsustainable economic activity or the degradation and depletion of the earth’s natural resources. The challenge here is how to put a value on nature – how do we price environmental damage? Although these criticisms have largely been addressed with the adoption of the System of Environmental-Economic Accounting by the UN Statistical Commission earlier this year as the international standard for environmental accounting.

Despite all these criticisms, GDP remains the prominent general-purpose barometer for our collective economic progress. Counter intuitively, the glut of alternatives developed to challenge GDP’s hegemony seem only to have cemented the dominant position it enjoys. The abundance of rival indicators illustrates the lack of consensus on a suitable replacement and has arguably undermined the credibility of each individual challenger. So, while many of these new indicators may in fact represent real technical progress, their sheer volume can also be viewed as a metric of failure. Despite GDP’s shortcomings, it still enjoys economic hegemony and massive cultural authority. For example, 17 of the SDG indicators rely on GDP and a further 3 on Gross National Income. In Europe, 5 of the core and 10 of the auxiliary, indicators used in the macroeconomic imbalance procedure scoreboard are dependent on GDP, either as a nominator or denominator. Many other indictors and composite indices include and are weighted by GDP. 

How might GDP, an indicator so deeply embedded in every aspect of our measurement systems, be replaced? One approach continues to recognize the importance of GDP as a key indicator of economic performance, but also recognizes its limitations, and consequently attempts to complement it with other economic, environmental, and social indicators to provide a comprehensive assessment of progress not only of the economy, but of society as a whole. This ‘dashboard’ approach is supported by Stiglitz-Sen-Fitoussi. On the other extreme, others argue a single replacement aggregate indicator that incorporates wellbeing, globalization and environmental sustainability is required. The idea of measuring everything in a single indicator is not an attractive or logical proposition to a statistician. As Hayak, the godfather of neoliberal economics noted, ‘The welfare and the happiness of millions cannot be measured on a single scale of less and more’. But others have argued, that if GDP is the only number that politicians, media and the markets pay attention to, then any alternative will probably fail or be ignored. Therefore, the solution may be to adapt GDP to incorporate climate change issues, environmental degradation, inequality, and wellbeing.

Why, you might ask, does this matter? It matters because statistics not only measure our lives, but in doing so, they also define and shape our reality. So how GDP is measured, and how it is used, matters a great deal. The debate regarding the future composition and use of GDP will impact us all. The economy is always changing, and the SNA and GDP must constantly adapt to remain relevant. Many of the criticisms of GDP regarding globalization, digitalization and services are valid – and significant methodological work is being done to address these issues. But as long as we continue to misuse GDP, as long as we continue to apply it in inappropriate ways, GDP will be scapegoated for a crime for which it is largely innocent and will be doomed to remain the statistical indicator we love to hate.

About the author

Dr. Steve MacFeely is currently Head of Statistics and Information at UNCTAD. He will soon join the World Health Organisation, (WHO), as the Director of Data and Analytics, this coming July. Dr. MacFeely is also Adjunct Professor at the Centre for Policy Studies at University College Cork in Ireland and the director of the IASE International Statistical Literacy Program. 

He co-chairs the Committee of the Chief Statisticians of the UN System (CCS-UN), chairs the Advisory Board of the Statistical Journal of the IAOS, and is a member of the statistical advisory panel to the UNDP Human Development Index.

He is an elected member of the International Statistics Institute.

He was a co-lead on the Data Strategy of the Secretary-General for Action by Everyone, Everywhere 2020 – 2022, and a lead author of the 2020 System-wide Roadmap for Innovating UN Data and Statistics.

Before joining UNCTAD, Steve was the Deputy Director-General at the Central Statistics Office (CSO) in Ireland and Programme Director of the joint CSO - Institute of Public Administration ‘Professional Diploma in Official Statistics & Policy Evaluation’.