The mission of a society is to bring prosperity to its members. This prosperity can be measured by the provision to the population of goods and services which determines the material standard of living of this population (Professor Dr. Andreas Irmen, “what is economic growth?” 12/10/2021).
The increase of the total amount of goods or services provided to the population over a given period is called Economic Growth. It can be measured in absolute or relative value.
How is economic growth measured?
After centuries attempts to measure the economy and its performance, economists have, after World War II, developed and agreed around the concept of Gross Domestic Product (GDP).
GDP is defined as the value of all domestically produced goods and services net of all intermediate inputs at market prices of the previous year. It is calculated on an annual base and can be expressed in absolute terms or per capita.
We talk about Economic Growth when there is an increase of GDP over two consecutive period.
As, the notion of performance of a society is measured by its capacity to bring prosperity to its members, GDP is used as the key performance indicator and the only compass for policy makers (while “happiness” is ultimately the driver of prosperity and thus growth).
A loose compass…
While used as a compass, GDP growth is only an approximation, based on estimations implying uncertainties. To manage them, estimates and revisions are made on a quarterly basis (3 per year and final GDP).
Over the period from 1989 to 2009, the average revisions of GDP estimates were between 0.3 to 0.6 percentage point (p.p.) which leads, for example to an uncertainty interval of -6.8% to +13.84% for an announced GDP growth of 3%.
Such a compass is not to be envied by the Romans…
« Those attempting to guide the economy and our societies are like pilots trying to steer a course without a reliable compass »Amartya Sen and Joseph Stiglitz to President Sarkozy in 2008[i]
Unfortunately, GDP is the main if not only one used by economical leaders to manage the global economy.
As Robert Kennedy has said “Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”[ii]
GDP measures mainly market transactions. It ignores social costs, environmental impacts, and income inequality (Constanza et al. 2015).[iii]
Despite this “imperfection,” the GDP has the advantage to be simple to explain, understand and communicate. Thus, business models and economies have been designed to ensure a perpetual and unlimited growth.
[i] Kate Raworth, Doughnut Economics Seven Ways to Think Like a 21st-Century Economist, Chap 1 – p43)
[ii] Remarks at the University of Kansas, March 18, 1968. https://www.jfklibrary.org/learn/about-jfk/the-kennedy-family/robert-f-kennedy/robert-f-kennedy-speeches/remarks-at-the-university-of-kansas-march-18-1968
[iii] Costanza, Robert, Ida Kubiszewski, Enrico Giovannini, Hunter Lovins, Jacqueline McGlade, Kate E Pickett, and others, ‘Time to Leave GDP Behind,’ Nature, 505 (2015)