Rethinking “Gross Domestic Product”

VectorMine (n.d.). GDP vector illustration [illustration]. Shutterstock. https://www.shutterstock.com/es/search/gdp

What is the so-called “Gross Domestic Product (GDP)”, what is the problem with its current definition, and why should we care?

The GDP could be defined as the total value added of a given economy from all the final goods and services it has generated in a given year. It usually refers to a specific country but can also be applied to a region or more than just one country, e.g. the European Union. It is a measurement reference that aims to determine how much value added has generated an economy. Such a concept is widely used to measure economic and social parameters within such entities, including “progress”, “growth” and “welfare” among others.

In this scenario, the value added to an economy is the result of deducting the necessary cost of bought-in materials, components, and intermediate consumption from the final value of goods and services produced.

Under the traditional GDP definition, an item or service gains value added only when it is exchanged against money. However, a lot of things add value in our lives and yet are not paid. Does this mean that they should not be counted for the purpose of measuring the “progress”, “wealth”, or “welfare” of a country?

Objectively speaking, the affirmation “the more value added an economy has, the better is the economy” is true. However, if we take a closer look at the parameters considered to obtain the GDP numbers, one can spot, as we will see below, that relevant sectors that should be counted are left out and others should be re-interpreted.

In the GDP count, the expenditure on war and natural disasters is usually considered as added value, since the “recovery” after the events adds value to society, regardless of the number of losses and damages that have preceded them. In these cases, expenditures that are included may not strictly add value to an economy if we also include all the liabilities that have preceded them—loss of infrastructures, natural resources, homes, even lives. In fact, more likely than not, the losses could outgrow the benefits.

Also, some works such as housework, everyday domestic services, and personal care are not included in the equation for the GDP count. All volunteer services are excluded from the GDP definition, regardless of who benefits from the work—a family or an organization—but not all volunteer production of goods is excluded.