Is GDP broken?

The UK's GDP shrank for the first time since 2012

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Wrong measurement? Should GDP be used to measure the economy?

By Daniel J. McLaughlin

The UK's Gross Domestic Product (GDP) shrank for the first time since 2012, sparking fears of a recession. But what exactly is GDP, and is it a good measurement for the economy?

Some argue that the measurement is broken, and should be fixed.

However, others believe we should accept the limitations of using GDP as an indicator of the country's economy.

The Claim

Forbes' David Dawkins says that GDP is broken - and there are leaders trying to fix it.

He argues that the current measurement of the economy works for politicians, and politicians alone.

Dawkins argues: "Like so much of the Bretton Woods era global economic consensus, GDP is a broken measure that fails to answer so many of the urgent questions the ordinary American are unable even to ask.

"Is that 2.1 per cent creating jobs; is that 2.1 per cent bridging or extending the gap between the highest and lowest earners; is that 2.1 per cent using up the last of our precious resources.

"In short - how will that 2.1 per cent change my life? And it is in answering these questions that GDP fails, so very hard."

The Counterclaim

Bloomberg's Noah Smith admits that there are problems with GDP - such as leaving out things that represent value or representing only a snapshot of the present, rather than the future.

While others call for a method to measure wellbeing over GDP, he believes we should accept the limitations of the current economic indicator.

Smith argues that the solution to the problems "doesn't lie in trying to fix GDP, or replace it with another indicator".

He writes: "Instead of trying to update GDP to include sustainability, health, education, happiness, equality, leisure, and safety, leaders should monitor these things independently.

"Fortunately, there is every indication that most of them do this already."

Smith concludes: "So instead of trying to fix GDP, it's better to simply remember its limitations. It is not the one economic number to rule them all, but simply one of a broad set of indicators of a society’s success."

The Facts

GDP stands for Gross Domestic Product. According to the Bank of England, it is "perhaps the most talked about economic concept".

They explain that it measures the size and the health of a country's economy. The Office for National Statistics collects data from thousands of companies, and they measure GDP in three different ways: the total value of goods and services (‘output’) produced; everyone’s income; or what everyone in the country has spent.

They are the country’s ‘output’, ‘expenditure’ or ‘income’. When the term 'GDP growth' - also called economic growth or simply “growth” - is used, it usually signifies the overall strength of the economy.

The UK economy shrank by 0.2 per cent between April and June. It is the first time the country's GDP has contracted in seven years.

There are fears that the UK is close to a recession. The pound sank to a 31-month low of just over $1.20 against the US dollar. It dropped to €1.0736 against the euro, a level not seen since the financial crisis a decade ago.

The economy had shown 0.5 per cent growth in the first quarter, with manufacturers stockpiling ahead of Brexit. However, the second quarter's performance has seen all three main sectors of the economy struggling.

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