The 6 Biggest GDP Mistakes You Can Easily Avoid

[Faheemkhatri4]

Many people choose avoidance as a coping strategy when they encounter an unpleasant person. However, this can backfire.

Consumption demand accounts for the largest percentage of GDP. But there are other things to consider as well. For example, a nation might cut down $200 worth of trees that are then used to make $150 worth of lumber and $250 worth of bookshelves.
1. Not Keeping Track of Inventories

For over seven decades gross domestic product (or GDP) has been the global elite’s go-to number. It’s used to rank countries, determine the amount of debt a nation can take on, and measure economic progress. But it’s past its sell-by date, critics are warning.

One reason is that the concept fails to account resume là gì for a large portion of the economy. In poor nations, for example, black market transactions are largely invisible to official estimates, while volunteer work like looking after an ageing relative or doing someone’s laundry counts for nothing. Then there’s the fact that GDP doesn’t include activities such as gambling and sex.

Economists try to overcome these limitations by separating intermediate versus final goods, says Econlib columnist David Henderson. For instance, a farmer might sell wheat to a miller for $100, which is then made into flour. Then the baker might sell the flour to a grocery store for $150. But the wheat itself doesn’t count in GDP because it is consumed during production, whereas the bread sold to consumers counts as GDP.

The problem with this approach is that it is rooted in a manufacturing age, where production meant “things you can drop on your foot.” Today, up to 80% of our economy is in services, yet GDP breaks the sector down into just 24 separate industries. And it doesn’t capture the quality of services – whether that’s better food in your local restaurant or an airline with a better safety record.
2. Not Keeping Track of Investments

While most first-year economics students can recite GDP’s definition — the total value of all goods and services produced over a period, adjusted for inflation — it’s an increasingly dated concept. The measurement was born of the Great Depression, and its inventor, Simon Kuznets, envisioned it as a yardstick of industrial progress, not wellbeing.

Its limitations are many. It is a measure of things that can be counted, not of everything that can be valued – it counts cars built, Beethoven symphonies played and broadband connections made, but it also counts plastic waste bobbing in the ocean and petrol consumed while stuck in traffic. It excludes unpriced activities such as volunteer work and looking after elderly or disabled relatives. It is skewed toward manufacturing. And it has no way of accounting for the informal economy, which is huge in much of the developing world.

By convention, GDP is restricted to goods and services that are sold for consumption, investment or government spending. This is a laudable aim, but it creates serious distortions. It excludes the output of factories that make products that are sold for other purposes, and it also fails to take into account the price of labour – a classic example is a man marrying his maid, which will decrease GDP even though she continues to perform the same duties as before. A better measurement would be “value added,” which is equal to the selling price of a good or service plus the cost of all non-labor inputs.
3. Not Keeping Track of Government Spending

The size of a nation’s overall economy is typically measured by its gross domestic product, or GDP. To calculate GDP, economists count the production of millions of different goods and services—smart phones, cars, music downloads, steel, bananas, college educations, and so on—and add them up. To make this work, they have to account for both the quantity of each good or service produced and its price, which they do by breaking down the total into five categories: durable goods, nondurable goods, services, structures, and changes in inventories.

But even this approach has its problems, which are amplified when the economic world becomes increasingly global and made-to-order. To take just one example, GDP assumes that bigger is better, a view rooted in an era of farms, production lines, and mass markets. But this is not necessarily true in a world where an Airbnb hotel or free software upgrade can renew aging computers, and Facebook and YouTube bring hours of entertainment to hundreds of millions for no cost at all.

These and other problems are compounded by the fact that GDP relies on monetary values and prices, which are notoriously hard to pin down. As a result, GDP can be misleading, even when it is accurate. This is why many economists, including Nobel laureate Paul Krugman, warn against using it as a measure of welfare. To get the most accurate picture of a country’s well-being, they argue, we need to subtract from GDP things that are bad for human welfare—like arms sales and financial speculation.
4. Not Keeping Track of Exports

Gross domestic product, or GDP, is the measure of a country’s total economic output in a year. To calculate GDP, economists add up the value of all new goods and services produced in a country (minus materials used to make them) and then multiply that figure by the price at which those goods and services sold. This allows them to compare a nation’s economy with the economies of other nations.

By convention, however, government statisticians only count the value of final products, or those that are ready for sale to consumers. This avoids double counting, for example, when a tire manufacturer sells tires to a truck manufacturer who then uses them on a new truck that they then sell to a customer. That truck isn’t added to the truck maker’s GDP because the tire manufacturer did not count it as part of its original output.

This convention also means that foreign trade is treated as neutral, even though it might shift workers and physical capital investment away from one industry toward another. It is for this reason that Paul Krugman, for example, argues that free trade deals do not raise GDP because any increase in exports must be countered by an equal increase in imports. The problem with this argument is that it assumes that all market transactions are purely productive, which is simply not true. In fact, much of what is produced in the modern economy is not sold in markets at all.
5. Not Keeping Track of Imports

When people describe the size of an economy, they typically cite its gross domestic product (or GDP). This figure is a sum of all final goods and services produced within a country in a year, minus the imports of those goods. This method of measuring the size of an economy is popular because it takes into account all goods and services that are available to consumers, as well as all capital investments. This includes things like smart phones, cars, music downloads, and college educations.

To make a more accurate calculation, government statisticians have to distinguish between the various stages of production. For instance, wheat seeds are counted as one stage of production, but wheat flour and bread are considered separate stages. This allows them to avoid double counting.

However, this can lead to some strange distortions. For example, financial services are not included in the GDP calculation, but they are a huge part of an economy’s economic activity. This distortion is partly caused by the fact that finance is a service industry, which makes it difficult to measure. It is also caused by the fact that many finance activities are not priced in the market, such as the spread between a risk-free interest rate and a lending rate.

These distortions can have serious real-world consequences. For example, they can cause governments to spend money on things that do not improve quality of life, such as arms and financial speculation. They can also lead to an unwarranted fetishism for GDP growth.
6. Not Keeping Track of the Underground Economy

For seven decades, GDP has been the global elite’s go-to number. It sounds simple enough: a measure of how much stuff, adjusted for inflation, is being produced over a period. But calculating it is a tricky business. It is hard enough for an economy of farms, production lines and mass markets, but for today’s rich economies dominated by made-to-order services, it’s almost impossible to get a handle on.

One big problem is that the GDP concept does not account for some types of output. It does not count black market activity like drug sales or under-the-table transactions like a teenager getting paid to babysit for a night. It also does not include unpriced services such as free long-distance phone calls or digital music downloads. These things may seem trivial, but together they add up to billions of dollars lost that should be reflected in GDP numbers.

Another problem is that GDP does not account for the value of intermediate goods. For example, a wheat farmer produces a certain amount of wheat seeds. Company A then takes those wheat seeds and makes flour out of them. Company C then makes bread from the flour. The price of the bread is included in the GDP calculation, but not the cost of the wheat seeds or the flour.

These problems make it hard to compare GDP from one country to the next. They also make it easy to mistake GDP growth for economic progress, even though growth does not necessarily mean that people’s lives are getting better.