The misguided critique of GDP

In yesterday’s Weekend Australian, Mike Steketee joined the list of GDP critics.

Some high-profile economists have given this critique some credibility. And it certainly needs some big names to rescue a very small idea.

There are two components to the critique, one resting on a mistaken assumption, and the other true but irrelevant.

The mistaken assumption is that we inappropriately use GDP as a measure of broad national welfare. Steketee uses as his examples of this:

When the Reserve Bank decides whether to raise or lower interest rates, it looks at a range of economic indicators, but none is more important than the quarterly GDP figures. The same applies to the government when it is framing its annual budget. GDP has become the de facto measure of national welfare.

But these examples are less than compelling proof of this assumption. The RBA’s major indicator isn’t GDP growth, it’s inflation. GDP is one of many indicators considered in the budget, but it is hardly inappropriate – since the government primarily taxes income and consumption, GDP is a crucial indicator of its fiscal capacity, as well as being correlated with other important indicators such as employment. Continue reading “The misguided critique of GDP”