GDP: The Great Deceiver

Gross Domestic Product (GDP) is commonly referenced in public discussion and policy decisions.  It could be argued that GDP is the most important statistic in the world of politics, both domestic and international.  Given how important this particular measurement has become to our political decision-making, it is alarming when we consider that it is a very loose approximation for economic output, not a precise measurement.

 GDP does not measure what was produced in a year, as it claims to.  Rather, it measures what people paid for in taxable transactions in a year.  Though related, these two values can diverge quite significantly, and growth or decay in one does not necessitate a similar move in the other.  Consider the following scenarios:

 A family has a small plot of land behind their home which they use to grow vegetables and fruits.  They eat all that they produce, and they never sell any of it.  One year, there is a drought and all of their fruits die.  They produced less, so production is down.  But they have to go out and buy their produce now, so GDP actually goes up!

A jewelry store charges $500 for a necklace.  Each one sold increases GDP by $500.  Then they have a sale, 30% off!  Now the exact same necklaces only raise GDP by $350 each.  GDP changes while actual production remains constant.

A man stays at home to cook food, educate his children, maintain the house and their belongings, and bargain hunt.  Then, he decides to enter the workforce to bring in more money.  To achieve this, the children go to school and a teacher is paid, but they the kids actually receive less education.  Repairmen and cleaners are hired, but the home and garden are kept in worse condition.  Restaurants and delivery boys receive payments, but the family receives less nutrition.  The man works and receives payment, but has less free time left over and a very similar income:expenditure ratio.  GDP expands tremendously while production improves only slightly.

A fishery improves net technology and manages to capture 99% of the fish stocks in its area.  GDP rises sharply (that year), but the productive capacity of  fishery was actually severely reduced.

A band of hooligans breaks all the store windows on a street.  The store owners all pay for replacements, so at the end of the day they have the same amount of stuff minus the cost of window repair.  Yet GDP has risen!

A large, thriving shadow market exists for a banned substance.  The government lifts the ban, and all of the shady operations move into formal economy.  GDP rises even if less of the substance is produced there.

 In conclusion, an increase in GDP could reflect an increase in production.  However, it could also reflect liquidation of productive resources, replacement of damaged capital or goods, formalization of shadow markets, inflation, price gouging, or a decrease in self-reliance.  Given how ambiguous this term is, it seems crazy to me how much policy is tied directly to it.