Saturday, May 23, 2015

GDP: A Brief But Affectionate Review

For a neo-paleo-Keynesian like me, the first week of an undergraduate macroeconomics lecture is taken up with accounting: Tedious but necessary. What is GDP? How is it different from GNP? National Income? How do we measure it? Does it matter? I've always struggled with outside readings to fill this material out and make it interesting. Now I have one. Diane Coyle has written a timely and very readable little tome about her love affair with national income accounting. It's very short, and you will be able to gobble it down in an afternoon. I did, while whiling away a few hours on a flight.


Why? You say! How could this be interesting? It's interesting because it has a lot to say about the current controversy over productivity. Unemployment is almost back to normal in the UK and the USA. But Real GDP is lagging well behind trend. How could this be?

We have been drinking the index-number cool-aid for so long that we have forgotten how difficult and ambiguous it is to construct a measure of aggregate product in a world where more than 60% of GDP is intangible: as Diane would say, it is weightless.


It is tempting to give up entirely on measuring real GDP and implicitly on economic growth. One might argue that we should be far more concerned about resource utilization than about the number we attach to an increasingly diverse bundle of differentiated commodities. Unemployment matters. What we produce, in a modern market oriented economy, arguably, matters less.


If we are interested primarily in resource utilization, the stuff of business cycles, there is an alternative to standard measures of real GDP. We can divide nominal GDP by a wage index, instead of a price index. Labor has a least a semblance of homogeneity and aggregating the time input of doctors with that of burger flippers is surely easier that adding plum puddings to computer chips. I showed how to do this, in a recent book, by using national income accounting data to estimate the money wage: My wage index data is available here.


I do not want to suggest that we should stop trying to measure growth. Economic progress is an important idea as 1.5 billion Chinese can attest to. If we must be metaphorical bean counters, and there are few alternatives to counting progress, there is no alternative but to bite the bullet and produce the best measures of an aggregate price index that we can. But as Diane reminds us, small revisions to our measurement methods can cause very large revisions of our estimates. Let's not be too concerned when our index numbers temporarily misbehave.

5 comments:

  1. A bell shaped probability distribution of price sounds like real potential.

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  2. Suggest you have a look at Geoff Tily's review of Coyle's book. Tily is chief economist at the T.U.C. "The National Accounts, GDP and the ‘Growthmen’"

    https://www.primeeconomics.org/s/CoyleReview_Tily.pdf


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  3. How about targeting capacity utilization and UE?

    "Unemployment is almost back to normal in the UK and the USA. But Real GDP is lagging well behind trend. How could this be?

    Unemployment matters. What we produce, in a modern market oriented economy, arguably, matters less."

    Maybe I misunderstood. What we produce greatly influences productivity and real GDP growth though. If we have a system excessively financialized and oriented around credit then productivity will be undermined.

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  4. In the UK, producing credit accounts for a large chunk of measured GDP. How to measure that is one of the main themes in Diane's book.

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  5. «a measure of aggregate product in a world where more than 60% of GDP is intangible: as Diane would say, it is weightless.»

    it is not "weightless", it is largely fictitious and in significant part the product of fraud (e.g. financial sector value "added"), or pointless service activity (what Graeber has called "bullsh*t jobs").

    Stiglitz realistically pointed out that:

    «For example, while GDP is supposed to measure the value of output of goods and services, in one key sector - government - we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more - even if inefficiently - output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4 percent to 38.6 percent in the U.S., from 27.6 percent to 52.7 percent in France, from 34.2 percent to 47.6 percent in the United Kingdom, and from 30.4 percent to 44 percent in Germany. So what was a relatively minor problem has now become a major one.
    Likewise, quality improvements - better cars rather than just more cars - account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: Much of medicine is publicly provided, and much of the advances are in quality.»

    Never mind that since "real GDP" is a market-moving and vote-moving index its calculation has been adjusted several times per decade, and nearly always to "correct" what have been claimed to be underestimates.

    For example the Gerschenkron effect has become a standard practice in the methodologies used to compute the "nominal GDP" index.

    «It is tempting to give up entirely on measuring real GDP and implicitly on economic growth.»

    But all these discussions are based on a fundamental trick of terminology.

    GDP properly defined is a vector of physical quantities: tons of cement, millions of cars, millions of tons/miles of railway transport, hours of legal advice, hours of movie screenings, etc. Only GDP so defined is the true measure of (gross) domestic production in a given time period.

    "nominal GDP" is merely an index, that vector of physical quantities multiplied by *some* vector of prices, and which vector of prices matters a great deal to the usefulness of the index. There can be many different nominal GDP indices depending on the vector of prices, while (gross) domestic production of course is uniquely defined by events. As Stiglitz and others have pointed out USA "nominal GDP is also multiplied by an arbitrary vector of "hedonic adjustments" defined by the BEA.

    "real GDP" is also an index, multiplied by a vector of prices and a vector (or a scalar) of price deflators. There can be many "real GDP" indices depending on which price vector and deflator vector (or scalar) are used.

    The above points, and especially that "nominal GDP" and "real GDP" are both in significant part arbitrary indices derivced from GDP, and not GDP itself, are essential to any discussion, and to understand the many "adjustments" involved in the methodiologies used in computing those indices.

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