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GDP is a Garbage Measurement | Here’s Why
In the previous post, we learned what GDP was and what it measured. It basically measures the value of all goods and services produced within an economy.
So, do we want as much GDP growth as possible? Well, not necessarily.
Sometimes, GDP growth isn’t a very good indicator of a country’s development. GDP just represents the added value the economy has managed to achieve given a set of inputs. It doesn’t tell us what the country does with that money after it has been earned.
For a country to achieve economic development, the income earned has to be invested in the economy to allow even more future growth.
An example of this is Equatorial Guinea, where annual GDP grew by 18.6% from 1995 to 2010. That’s more than twice the GDP growth of China (around 9.1% during the same time period).
So why does nobody talk about Equatorial Guinea as being a great economy? Many have heralded the Chinese economy for its amazing growth over the last few decades. Many have made excited references to the ‘Chinese economic miracle’. So, what’s the difference?
Here’s why:
1. Equatorial Guinea has a population of only 700,000 people
2. GDP growth did not come from increased productivity
3. GDP growth came from the discovery of large oil reserves which led to an inflow of investment
A more suitable indicator for the health of an economy is development. Development describes how economic growth has occurred as a result of increased productivity capacities. Therefore, a developed economy has managed to organise and mould production in such a way that has improved growth capability.
An example is investment into large factories to boost economies of scale, or new technologies that open up new markets for growth.
Another great way to measure economic development is the proportion of GDP that is reinvested. If country’s reinvest profits back into the country, by purchasing capital for example, this can boost a country’s development potential.
One visualisation of this is CNC machines (computer numerical control). These machines are programmed to translate models into actual products. They’re far superior in terms of speed when compared to machines operated by humans.
If a company invests into machines that can automate production, this can boost productivity and the company can sell more goods in less time. This is called productive efficiency.
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