0
$\begingroup$

I am just a lay person confused about why GDP is a good measure. For example, in the news, it is always reported that GDP grew in the last quarter etc., or China is the only country experiencing GDP growth during the pandemic (may not be true), the implied understanding being that GDP and GDP growth matters a lot.

However, I think it is not a good measure for a few reasons.

  1. It is not a good measure of the military strength of a country.

My understanding is that GDP is a measure of how powerful a country is. In 1940s, a country with the greater GDP would be the country that would win a war.

For example, consider steel production. It's a measure that tells you which country is stronger and more likely to win if a war broke out between them during WW2.

If both countries are entirely producing similar things that are important for industry e.g. steel and food, then GDP would be a fair measure that gives you accurate comparison between these countries.

However, I feel GDP is not a reliable measurement in that regard. For example, a country may have higher GDP but its GDP might consist of entirely non-industrial things, like video games, or in game items. If a war broke out between this country and another country with lower GDP but produces industrial things, they would not win.

  1. It calculates monetary value but not actual amount

Suppose I am coder and before I wrote 1000 lines of code in a day of work and sold my service for \$100 a day. Now I write 10000 lines of code but I still work for $100 a day. The actual amount of thing that is produced and consumed has increased but the GDP is unchanged.

Would greatly appreciate any clarifications.

$\endgroup$
1
$\begingroup$

My understanding is that GDP is a measure of how powerful a country is. In 1940s, a country with the greater GDP would be the country that would win a war.

Your understanding is incorrect GDP is measure of gross domestic output. It is an economic measure of the size of economy. You can think of it as an income for a country (somewhat analogous to your personal income). GDP growth just measures how economies income grows from year to year (e.g. again as an analogy you could compare it to your wage growth). You can learn more about GDP in this BEA explainer of what GDP is and how it is used.

It has nothing to do with military might. The same way as a person might be rich (in terms of earning high income) or experiencing high wage increase (maybe person gets quickly promoted every year and earns higher income) the same person might be terrible fighter, and vice versa a poor person might be poor but good at boxing, high income country might have its military completely in shambles while poor country can have strong military. GDP can correlate with strong military, because rich country can buy more fancy guns, but this is a policy choice, a rich country (such as many EU countries) can decide to spend its income on subsidized healthcare or education instead of guns.

GDP and GDP growth is supposed to measure economic activity not military might, GDP is relatively good measure for what it is supposed to do.


It calculates monetary value but not actual amount

This is by design. In economics we care about value not just about bare quantities. If some farmer produces 1 rotten apple then for sure that 1 rotten apple should not count the same toward country's economic output than 1 juicy large first class apple produced by some other farmer. Counting that in terms of production as 2 apples would be clearly misleading.

Market prices, contain information about value of product, if someone is willing to spend \$100 on apple, then that tells you the apple created at least \$100 of economic value (e.g. some juicy first class apple), if on some other apple someone is willing to spend only \$1 then it created only \$1 worth of economic value. Or in your example if you write 1000 line of important code that will have the same value as having 1000 line of code that has to be there and writing another 9000 lines of junk code (if the other 9000 lines were valuable then the resulting program should have higher value which will count towards GDP).

$\endgroup$
3
  • $\begingroup$ I’m not satisfied regarding the second point. I actually mean 1000 lines of good code vs 10000 lines of good code. They are of the same quality. Put another way suppose gdp consists of only one item, an iPhone. In 2020 and 2010 gdp were both $1000. But the quality of product is better in 2020 than 2010 (iPhone 11 vs iPhone 3). So gdp was the same but the products produced and consumed in 2020> 2010. Alternative this argument could be presented in terms of quantity of product as in lines of code. $\endgroup$ Jul 25 at 13:29
  • $\begingroup$ @i_dont_know 1. If the lines of code have same market value then the extra 9000 lines of code do not add any value no matter how good you think they are. For example, you can sculpt statue you believe is beautiful but unless anyone wants to pay anything for the statue you did not really created any economic value (except for yourself if you keep the statue for own enjoyment) 2. The iPhone example is actually completely different example, that is about quality changes over time. Real GDP calculation actually adjusts for quality change across time using various statistical methods $\endgroup$
    – 1muflon1
    Jul 25 at 13:34
  • 1
    $\begingroup$ 3. One can criticize GDP along various lines, for example for it ignoring home production or gray and black markets which are all valid sources of economic value, but nobody is saying GDP is perfect. GDP is widely used because relative to other alternatives it is good economic indicator given how easily and relatively objectively it can be calculated. One can try to construct more nuanced measures of economic activity but they typically suffer from too much subjectivity or being to complex to be possible to construct them without painstakingly long research $\endgroup$
    – 1muflon1
    Jul 25 at 13:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.