Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge and author of GDP: A Brief But Affectionate History, explains why gross domestic product is no longer an adequate means of measuring the state of the economy.
GDP serves as “a measure of the whole of the economy,” says Coyle. Defined during World War II, it was based on the demand-management theories of economist John Maynard Keynes. Elements of the formula include consumption, investment, government spending and exports net of imports. GDP plays a crucial role in defining government monetary policy and determining the rate of inflation.
As important as it’s been as a measuring tool, though, GDP “is not something that exists in the world — it’s an idea,” Coyle says. And it’s an idea with problems. It doesn’t include such key factors as unpaid care in the home and other non-market transactions, leisure time, or activities that result in environmental degradation. Nor does it reflect the realities of the modern-day digital economy, as exemplified by innovations such as cloud computing.
The reality is that the state of the economy can’t be entirely represented by a single number. Some have attempted to augment GDP through the introduction of dashboards, representing crucial categories such as housing, trade, distribution of income — “whatever people think is important,” Coyle says. The problem is that there’s no consensus around what should be included. And the notion of one magic number remains “quite compelling.”
To devise a more accurate measure, Coyle proposes gathering much more data about the digital economy and supply chains. It should also account for the huge growth of “factory-less” production, whereby nominal manufacturers such as Apple and Nike limit their role to design and development, then outsource the actual making of the goods.
Coyle also advocates adopting a more efficient way of gathering all the economic data that goes into the GDP calculation — in essence, embracing digital methods to measure the digital economy.
