Monday, July 20, 2009

GDP is not very good at Measuring Global Growth

It's time for a new measure of growth because, in a world with globalisation - where much of the money you spend goes to another country - GDP is incompetent.

GDP increasing year on year is supposed to be a good thing, but why do we expect this to happen at all?

Where does all the extra money come from?

It comes from the planets limited supply of raw materials such as its coal, gas, oil, gold, iron and timber.
They're either being mined faster or becoming more precious because of their increased rarity.

It comes from the planets renewable materials, for example making water drinkable or generating electricity from wind and solar power.
(And, by the way it makes sense - if for no other reason than long term financial gain - for governments to invest in renewable power.)

It comes from farmed goods such as wheat, rice, fish, livestock and timber.

And it comes from the fact that, due to population increase, we are slowly using up all of the inhabitable space on the planet and that's driving
up land value. If you own a chunk of planet, its value is likely to be proportional to the global population.

And that's it, everything else is just inflation and national debt.

If I do a service for you, no value is created, dollars are simply exchanged. No new money enters the international mega-pot.

Governments can't just "make" money without inflation or currency devaluation. And devaluation is just another form of inflation when you consider the global economy as a whole.

Please tell me if I'm totally missing the point of GDP here! Because it seems to me to be a pointless measure of a global border-less macro-economy!


Tom Gaulton said...

Consider the tanker that transports oil from Iraq to the US. It's providing a service, but by doing so it adds value to the oil. A storage tanker full of oil in Iraq isn't worth much. The same goes for person and process involved in the process, right down to the attendant at the petrol station. After all, the oil is worth nothing if you haven't got someone to collect the cash from the customer.

From writing software to mowing lawns, if someone is prepared to pay for your service then you've added value - and that's what GDP is measuring. A good economy is really just one that keeps everyone busy, providing services to each other. After all, beyond food and shelter, we don't actually need most of the goods and services provided.

That's my take on it anyway :)

Ian Hickman said...

Thanks for the comment Tom.

I understand that the services add value to the raw materials, but I don't see how they are creating any new money in the global economy?

I don't understand how the global economy can grow faster than the change of the sum of the four income generators I've described.

To do so, extra money would need to be created in the form of inflation or debt - neither of which are good!