GDP has shortcomings but finding an alternative indicator is a challenge

Taking the measure

GDP has shortcomings but finding an alternative indicator is a challenge.

The word “gross” has more than one meaning and every possible meaning isn’t palatable. There are people who are engrossed in GDP, and its growth, on a daily basis. But just after the Union budget, many more people are interested in GDP which is the annual value of goods and services produced, as opposed to gross national income, which adds net factor income from abroad. GDP is a term widely used and also abused. I mean the concept, not quality of data. How can GDP measure welfare?
It doesn’t take into account distribution. Income, the foundation of GDP, is at best a means to an end. We should measure indicators that are ends — health, education, quality of environment. In a county like India, where there is “black” income, what sanctity does the official GDP have?
The father of national income measurement is Simon Kuznets, awarded the Nobel Memorial Prize in Economic Sciences in 1971. He worked with the National Bureau of Economic Research and was responsible for the first measurement of US national income. This was for 1929-32 and there was a 273-page report (1934) to Congress. It had a section titled “Uses and Abuses of National Income Measurements”. If one reads the report, one realises every criticism “discovered” afresh today was anticipated by Kuznets in 1934.
Here are quotes from the report: “The estimates submitted in the present study define income in such a way as to cover primarily only efforts whose results appear on the market place of our economy. A student of social affairs who is interested in the total productivity of the nation, including those efforts which, like housewives’ services, do not appear on the market, can therefore use our measures only with some qualifications. Secondly, the present study’s measures of national income, like all such studies, estimate the value of commodities and direct services at their market price. But market valuation of commodities and especially of direct services depends upon the personal distribution of income within the nation… The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.”
Or, “In determining which efforts of individuals may or may not be classified as services for the purpose of including their value in the national income total, the estimator must perforce follow the overt expression of social opinion as embodied in the nation’s legal code. That many illegal acts are of some benefit to one group or another and are being paid for, is no proof that these acts constitute a service from the social point of view… The investigator, unless he wishes to impose his own scale of values, cannot, therefore, treat earnings from such illegal pursuits as burglary, illicit drug traffic, bootlegging, etc., as bona fide parts of the national income.”

What does one make of the GDP critique? Given that there has to be a market (and resultant price) where goods and services are valued, one can improve the quality of data, but not GDP as a concept. Alternatively, one can think of indicators that supplement whatever GDP tells us.
There can be indicators like those in Millennium Development Goals or Sustainable Development Goals. Indicators aren’t the same as a summary or aggregate measure. Indicators can’t be reduced to a summary measure unless there are weights and an aggregation formula.
UNDP’s HDI (based on three heads of health, education, GDP) may be widely useful. However, equal weights attached to the three heads of HDI are subjective and arbitrary and have no rationale other than simplicity. (In traditional GDP measurement, prices are weights and therefore, there is no subjectivity.) It becomes messier when one has something like the Commission on the Measurement of Economic Performance and Social Progress, resulting in what is known as the Stiglitz-Sen-Fitoussi Report (2009). “The Commission’s aim has been to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement; to consider what additional information might be required for the production of more relevant indicators of social progress; to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way.”
The GDP critique was the easy part. Other than the aggregation problem, this report brought in subjective indicators on well-being. “Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey. While assessing quality of life requires a plurality of indicators, there are strong demands to develop a single summary measure. Some of these measures are already being used, such as average levels of life-satisfaction for a country, or composite indices that aggregate averages across objective domains, such as the HDI. Others could be implemented if national statistical systems made the necessary investment to provide the data required for their computation.” Paraphrased, we don’t quite know what an alternative summary measure (for GDP) might be. Let CSO figure it out