GDP, or gross domestic product, is perhaps the most widely used acronym when we talk about economic performance. It is a measure of output produced, both goods and services, by an economy in a specified time period. Mathematically, it is the sum of consumption, investment, government spending and net exports.
GDP data of major economies are closely watched by the financial markets, and often appear in the news headlines when they are published. They are useful in gauging the size of an economy, whether it is expanding or shrinking, and how fast the movement is.
For example, Hong Kong’s real GDP shrank 2.9% year-on-year in the third quarter of 2019, reflecting the impact of the social unrest on the city’s economy.
But like any other economic indicator, GDP has its limitations. For instance, depreciation and depletion of assets are not measured. As the modern concept of GDP was introduced in the manufacturing age of the 1930s, the measurement does not work so well with services. It also turns a blind eye to quality.
Unpaid work, from volunteering
to housework, as well as unmonitored black-market activities and the “informal sector” are not included. Economist Paul Samuelson once joked that if a man marries his maid, GDP would fall.
Meanwhile, GDP is not an ideal measure of well-being or living standards. For example: in Country A, with a population of 10 people and a GDP of $10,000 in a given year, GDP per capita is $1,000; in Country B, with a population of five people and a GDP of $10,000, GDP per capita is $2,000. It would be assumed that people living in Country B are wealthier and happier.
But what if GDP in Country A is evenly distributed to all 10 people, while the bulk of GDP in Country B goes to one person, with only a tiny amount is distributed to the other four? If this is the case, people in Country B are not necessarily as happy as what we may have assumed from looking at the GDP per capita figure.
Besides not taking inequality into account, GDP also does not consider environmental damage, which is increasingly becoming a global focus. Mainland China saw rapid GDP growth over the past four decades, but this economic achievement was accompanied by a considerable cost to the environment. Therefore, Beijing in recent years has repeatedly stressed its goal to pursue high-quality economic development with a focus on sustainability.
Furthermore, it can be misleading to interpret the state of an economy by looking at GDP alone. In the first quarter of 2019, the economy of the United Kingdom grew by 0.6% quarter-on-quarter, up from 0.3% in the previous quarter. At first glance, it seems to have registered a better performance.
However, this was in fact a temporary boost, partly due to stockpiling by businesses worried about a no-deal Brexit and hoping to avoid any supply chain disruption. The improvement in the GDP figure was therefore a reflection of crisis management, rather than a healthier economy.
With the emergence of the sharing economy, GDP also fails to consider new business models. Companies such as Airbnb and Uber allow people to make more use of otherwise idle resources, rather than producing more. Output is also being underestimated in the digital world, as GDP does not include the value of free online goods such as search engines, Wikipedia, online maps and translation applications. These make our lives easier and save time and costs for individuals and businesses.
In other words, a more efficient use of assets and an improvement in productivity are not necessarily reflected in the headline economic growth.
Joseph Stiglitz, the Nobel Prize-winning economist, has called for the retirement of GDP as a tool for assessing economic performance and social progress. This might be an overstatement, but we do need a more holistic approach to measuring economic development and well-being, in order to help governments to formulate the right policies to achieve a more sustainable economy for the future. Simply focusing on GDP is not the answer in an increasingly complicated world.
Some global leaders have called for incorporating new social indicators in budget planning, instead of focusing on traditional GDP data. The World Bank has created a new measure called “comprehensive wealth,” composed of produced, natural and human capital, and net foreign assets. Meanwhile, the U.K. Office for National Statistics launched its Measuring National Well-being programme in 2018, which tracks a wide array of parameters including income, life satisfaction, happiness and anxiety.
All in all, GDP alone is unable to show the full picture of the health of an economy and has become a less suitable indicator in the digital world. Reliance on it may ultimately lead to bad or ineffectual policymaking.
As Hong Kong gradually emerges from the unprecedented turmoil it experienced in 2019, it is high time to explore and adopt additional metrics for gauging our economic progress and whether the city is operating sustainably. These will help the city return to its pathway to success and provide an environment where businesses can truly prosper.