Wednesday, 26 March 2014

GDP growing out-of-date

GDP is becoming increasingly outdated as we do more and more online

It is hard for most of us to keep up with the blistering pace of changes in modern technology.  This is also true for economists and the discipline of economics.  Nowhere is this more glaringly obvious than when trying to assess how well the economy is doing.  Measures such as GDP (gross domestic product) hark from a time when our economy was mostly made up of physical goods which did not improve much over time (such as fridges or lawn mowers).  Advances in computing were already making life hard for economists, but greater use of online services may be the last straw.  How can we measure the economic output if we can get stuff online for free?

More is better?

GDP is an aggregate figure of the market value of all goods and services produced in an economy.  This way of measuring output focuses only on transactions where money changes hands and is based on the premise that more is better.  Things have become more complicated with rapid improvements in technology.  The problems started as exponential leaps in processing power made computers both faster and cheaper.  Progress is now so rapid that computers from just a few years ago are no longer available, making price comparisons over time near impossible (also causing issues with measuring inflation).

The impact is spreading as people find better ways of putting cheap computing to good use.  Replicating any content in digital form is virtually without cost.  Thus, the problems that initially confronted the music industry were soon felt by TV and movie studios as well as newspapers.  The effects are becoming more pervasive now that almost all of us have small computers in our pockets in the form of mobile phones.  Even mobile network providers, who would have been expected to benefit from greater use of mobile phones, are under pressure from cheaper alternative methods of communicating such as Skype or WhatsApp.

What really matters

Things we may have needed to pay for in the past are now considerably cheaper if not free, whether it be making international phone calls, reading the news, or posting job ads.  Computers are also able to do most of the grunt work of online services, making it easier to launch new products.  For instance, WhatsApp, which was recently purchased for US$19 billion, only has around 50 employees.  As a result, computers and the Internet can be used to provide more for less. 

It follows that a stationary GDP does not necessarily indicate a lack of progress.  This creates a dilemma for economists.  Economic data such as GDP is usually trimmed back to take account of inflation as higher prices by themselves do not mean that the economy is any larger.  Yet, better computers and cheap services provided online suggest that normal GDP figures need to be increased to account for the wealth of benefits that are available without having to pay more money.

All of this tweaking of GDP is making the actual data less and less significant.  The weak recovery in places such as the UK may be due to a shift towards doing things online as people try to tighten their belts.  It may be the case that similar or even greater amounts of goods and services are being consumed but online and at a lower cost.  How can we account for this?

Rather than trying to add up everything in the economy, we could look at median earnings and how people spend their cash (including online freebies).  This is likely to be a better gauge at a time when wages are stagnating for most people.  Finding out whether the average person is better off has more real world relevance than focusing solely on levels of production.

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