GDP and Its Limitations
GDP and Its Limitations
GDP and Its Limitations
and distribution of goods and services. These activities are carried out (surprise, surprise) for
economic gains, ie, wealth, unless governments step in and de-optimize conditions to make
things more equitable. However, to keep increasing wealth, to make your country more equal,
or to compare yourself with other countries, it is necessary to know where you stand. GDP is
The IMF definition is as follows: “GDP measures the monetary value of final goods
and services—that is, those that are bought by the final user—produced in a country in a
given period of time (say a quarter or a year). It counts all of the output generated within the
borders of a country.” It is a Herculean task, but well worth the effort. GDP and its
components are used to direct government policies and monitor growth. But was it always
like this?
The first known use of GDP can be attributed to British noble William Petty (“Petty
Impressive,” 2013). His motivation for calculating this figure was twofold: firstly, in his
travels across England, Ireland, and the Netherlands, he noticed a lot of differences he could
not explain - England was prosperous, Ireland was struggling, and the Netherlands was
threatening to catch up. Second between 1652 and 1674, England and the Netherlands fought
three protracted wars over trade routes and control of overseas colonies (“Anglo-Dutch
Wars”). This, combined with the Great Plague of 1665, meant that the British economy was
William Petty, himself a landowner with a soft heart, thought this unfair, and set
about calculating what we would now call the GDP of England and Wales. In doing so, he
spent about 4.5 pence a day on necessities, and multiplying this with the population - and
arrived at the figure of 40 million pounds (about 35 billion 2010 dollars) (Nye, “Historical
Conversion of Currency”). But he did not stop there: he postulated that total expenditure in an
economy must equal total income, and calculated the income accruing to assets and capital
stock and that to wages as 15 million and 25 million pounds respectively, so that the tax
In 1695, the passive taxation advantage of GDP was superseded by warfare (Andreas,
2015). British economist Charles Davenant wrote in his work, An Essay Upon The Ways and
Means of Supplying the War, “In the course of this war we are engaged in with France,
nothing seems more to have hurt our affairs than an opinion, which from year to year has
been entertained among some people of authority, that the war could not last; which they
were brought into by the vanity, natural to our nation, of overrating our own strength, and
undervaluing that of our enemies.“ Basically, overestimating your wealth can lose you the
war. Hence, GDP began to be regarded as an important statistical tool to be realistic about a
country’s global position, and to dispel jingoistic rumours spread by those in power about a
country’s might.
It is especially disheartening then, to see the row and confusion over India’s GDP
numbers for the past several years due to discrepancies in survey methods (Ajaz, 2016). With
the Lok Sabha elections coming, those who place a premium on economic development from
their representatives will first have to painstakingly sort through the political mudslinging
between the BJP and Congress to arrive at our actual GDP growth, something we are used to
For a couple of centuries after, things are quiet. Then the world suffers the worst
economic disaster in modern history: The Great Depression. Amidst meltdown in 1934, the
US takes the stage. Simon Kuznets, an eminent economist, was tasked with assessing the
United States’ vital statistics after the crash and estimating what could be done to battle its
effects (“Simon Kuznets,” Econlib). This is perhaps the first use of GDP for welfare rather
than warfare. Kuznets estimated the United States GDP by developing the production
method, and breaking down the figures according to industry as well as final use of products.
Though he and the National Bureau of Economic Research were the first to collect and
analyze data so extensively, Kuznets also vehemently opposed the use of GDP/GNP as a
welfare measure, stating that it was only meant to measure how much the US economy was
producing and, later, its preparedness for World War II (Kuznets, 1934).
When the war broke out in 1939, GDP was once again placed in the familiar arena of
measuring military might through economic data, and this was probably the biggest push in
centralizing GDP as the prime statistic for comparison and interpretation. Enter one of
history’s most loved economists, John Maynard Keynes. Assigned to the UK Treasury in
wartime, he published a paper much like Davenant’s, titled How to Pay For the War, wherein
he stated (much like Kuznets) that governments since World War I were using unscientific
guesses at GDP, and no agency before theirs had undertaken a data collection and
computation effort of this scale. He, along with his new Central Statistics Office, adopted in
1940 an official method for GDP estimation, and caused most of Europe to quickly follow
When the war ended, the Axis forces were devastated, Europe was in ruins, and the
United States stood poised to gain control of the world economy. Whatever their states were,
at the 1944 Bretton Woods Conference, 44 Allied Nations came together to form the World
Bank and the IMF, to fix the values of their currencies and exchange rates, and to accept
GDP as the bonafide measure for comparing countries (Laurent, 2014). Though the Woods
system took about 15 years to perfect due to indebtedness and unequal balance of payments,
statistics and data collection, at much more detailed and accessible data on GDP than ever
before. Consider the following graph, which plots GDP over time for various countries:
This is a good example of how powerful and tempting a tool GDP really is, because
one look at this graph instantly answers several questions pertinent to economic growth and
global politics. It affirms the position of the US as an economic superpower, it confirms the
technological superiority of Germany, it impresses just how successful and enduring the
Industrial Revolution was in the UK, and shows one also where their country lies in
comparison for them to make their own deductions. Naturally, this graph is not the only thing
leading to such conclusions - they are based on a wealth of knowledge commonly agreed
answers.
Thus, through historical examples, we see two major motivations emerge for
investing so many resources into calculating this exhausting number: welfare and warfare.
Diane Coyle, author of GDP: A Brief but Affectionate History argues that GDP was a
great tool of measuring economic health in the twentieth century, but requires an expansion,
or to be read along with other metrics, in more recent times (Laurent, 2014). This makes
sense, as there are no big wars to fight anymore (hopefully), and, according to the UNDP,
economic inequality rose significantly in developing nations between 1990 and 2010
(“Humanity Divided,” 2014). Hence, countries are looking for more diverse ways of
Kuznets’ apprehensions were noted in the 30s itself in his first report to the US
Congress along with the national income accounts. He immediately realized that GDP in only
productive. Further, and more pertinent to knowing about welfare, it tells us nothing about
economist, publicly opposed the use of GDP in 1959. He stated more broadly in his essay,
The Allocation of Economic Resources, that social well-being cannot be said to grow with
economic growth.
In the decades that followed, several prominent economists and thinkers developed
approach by Amartya Sen and Martha Nussbaum in the 1980s called the capability approach,
than simply economic growth, but this had limited appeal to the masses and limited impact on
developed the much more accessible and popular Human Development Index, a now widely
used alternative to GDP in measuring social well-being. It uses social indicators like life
expectancy at birth for health, mean years of schooling for education, and gross national
income per capita for standard of living. However, it still does not factor in inequalities
(Human Development Reports). Amidst the debate on better numbers, environmentalists have
September 2006, China is the first to calculate a “green GDP,” and discovers that if
environmental damage entered GDP as a cost, it would reduce the number by 3%, which is
Finally, we have the peculiar case of Bhutan, where, since 2008, the government has
been officially calculating a vital statistic that guides policy and governance in the country:
Gross National Happiness. They collect subjective survey data, and compile national
happiness based on a few key factors agreed upon in their Constitution. The King,
Wangchuk, famously said that, to Bhutan, GNH is more important than GDP (UN
Sustainable Development Goals). Perhaps this is indeed the future of GDP and economic
accounting - factoring in the damage we do along the way not just to the world around us, but
also to our quest for knowledge and harmony. Economic data is definitely a double-edged
sword, and can be used for growth and development in several other spheres such as science
https://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm
https://www.economist.com/finance-and-economics/2013/12/21/petty-impressive
https://www.britannica.com/event/Anglo-Dutch-Wars
Andreas, Jonathan. GDP Was Designed For Warfare Not Welfare. Medianism, 27 Jun
welfare/
Ajaz, Taufeeq. The Reality of India’s Rising GDP Numbers. The Wire, 24 Feb 2019.
Davenant, Charles. An Essay Upon The Ways and Means for Supplying the War,
1695. The Political and Commercial Works of Charles Davenant, 1771. Retrieved from
https://www.academia.edu/24411537/Charles_Davenant_An_Essay_upon_Ways_and_Means
_for_supplying_the_War_1695_
https://www.econlib.org/library/Enc/bios/Kuznets.html
Coyle, Diane. Warfare and the Invention of GDP. The Globalist, 6 Apr 2016.
Laurent, Eloi. GDP at 70: What’s Next? The Globalist, 13 Apr 2014. Retrieved from
https://www.theglobalist.com/gdp-at-70-whats-next/
Humanity Divided: Confronting Inequality in Developing Countries. United Nations
https://www.undp.org/content/undp/en/home/librarypage/poverty-reduction/humanity-
divided--confronting-inequality-in-developing-countries.html
Osmani, S.R. The Capability Approach and Human Development: Some Reflections.
http://hdr.undp.org/sites/default/files/osmani_template.pdf
Dickinson, Elizabeth. GDP: a brief history. Foreign Policy, 3 Jan 2011. Retrieved
from https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/
from http://hdr.undp.org/en/content/human-development-index-hdi
https://sustainabledevelopment.un.org/index.php?page=view&type=400&nr=617&menu=35