How GDP statistics are misleading

GDP statistics are misleading for several reasons. The most important is probably that higher spending does not necessarily mean better lives. When Hurricane Helene ripped through the southern USA, all insured damages triggered monetary transactions – but such funding cannot restore everything that was lost. People died, for example, and precious heritage was destroyed too. 

Even where people are too poor for insurances, moreover, reconstruction after an extreme-weather disaster means growth. Nonetheless, the people concerned may be worse off than they were before.

It is important to understand, moreover, that GDP does not include all goods and services consumed in a country. When a family eats vegetables grown in its own garden, that food does not count, nor does the cooking of the meal. Should the same family enjoy the same dish at a restaurant, by contrast, it figures in GDP several times (farm gate price, transportation costs, wholesale price, wages for cooks and waiters, rent paid for the restaurant building et cetera).

Subsistence farming and communities’ self-help activities

This issue is important with regard to a country’s developmental status. Typically, subsistence farming is not paid, but it feeds masses of people in countries with low incomes. Moreover, communities in informal urban settlements are known for quite extensive self-help systems. For example, mothers normally do not need formalised daycare for their children. Some member of the community is always able to keep an eye on the children of different households who play together in groups. More generally speaking, care work increasingly tends to be paid and thus counted as GDP among prosperous communities, but much less so in poor ones.

Statistics, moreover, are never as precise as they seem. It is impossible to precisely track every coin or banknote that changes hands. Therefore, GDP statistics always include some estimates for black-market activity or the undocumented informal sector. Official data thus paint a systematically distorted picture of how disadvantaged people live.

Statistics are also only as reliable as the institutions that compile them. Where governance is not beyond doubt, official data are not either. Under Prime Minister Narendra Modi, the Indian government has changed its way of assessing GDP, for example, and Raghuram Rajan, the former governor of the country’s central bank, now reckons the numbers are systematically on the higher side for the recent years.

Development experts have known for a long time that income figures are only inadequate indicators of a country’s standard of living. That is why the UN Development Programme introduced the Human Development Index (HDI) in 1990. It takes into account indicators for health (in particular, the average life expectancy) and education (literacy rate, for example).

The HDI has attracted much attention in development circles. The general media, nonetheless, are still mostly focused on GDP growth. Business leaders and policy makers in general tend to do so too. Public discourse is thus still guided by a misleading paradigm.

The USA is a striking example of income data being insufficient. It consistently ranks higher in income statistics than in the annually compiled HDI. That fits a pattern. The USA has the highest per-capita spending on healthcare among high-income nations (more than $ 12,000 per year), but 54 other nations have a higher average life expectancy than its not quite 80 years at birth. The health sector in the USA is very expensive, but Americans’ health is not particularly good. 

PS: GDP growth is not a good indicator of success, but business media often refer to an even worse one: the performance of the stock market. The stock-market indices of leading high-income countries are currently at record levels. That is true even of Germany’s DAX, although this country is often referred to as the sick man of Europe in view of its sluggish economy, crumbling infrastructure and ongoing budget disputes. The full truth is that stock prices are rising as a response to falling interest rates. Investors expect higher profits from companies’ shares than from bonds. They are not necessarily expecting higher corporate profits. 

Praveen Jha is a professor of economics at Jawaharlal Nehru University in New Delhi.
praveenjha2005@gmail.com