A Thought on GDP

Ah, Gross Domestic Product. Is there anything more exciting?

Yes.

Even so, it’s important to know about. GDP is the best proxy we have for measuring wealth. Where GDP is low, people starve. Where it is high, even the poor are fat. If you’re going to have problems, which would you rather have? Making GDP grow is one of the central issues of the 21st century.

GDP is also flawed. Suppose I buy a wristwatch for $50; GDP goes up by $50. But I really like the watch. I value it at $200, four times what I paid. My personal wealth increases by $150, but GDP only counts a fraction of that. GDP systematically understates true wealth. It is inaccurate.

This doesn’t just affect my watch purchase. Remember, people won’t buy anything unless they value it more than the dollars it costs them. With every transaction, GDP systematically understates true wealth.

The problem with GDP is that it is measured in currency, which is only a proxy for wealth. True wealth, of course, is impossible to quantify.

Whoever comes up with a way around that has a Nobel with their name on it.