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GDP, what does it measure?

by on 19/07/2015

GDP is so much adored by economists, that it became the anchor for every measurement on national accounting. To my view it is a very partial tool to understand economic performance and wealth of a country. The very best example, where the GDP failed is the Greek economy. Before the Greek economic crisis at 2010, it showed GDP per capita comparable to that of Germany. Also the level of debt as percentage of GDP did not exceed 100% as compared to 170% today, after significant write offs of debts. How so? Because of heavy borrowing, that financed big share of the Greek economy in the past.

Other source of miscalculation GDP causes is it’s being tool for measurement of the current flow of economic activity, and not expressing anything about accumulated national wealth. Take for example countries like, Russia and China compared to US. US economy runs for years a huge current account deficit, and Russia or China, have years of surpluses. Yet which countrie’s economy is better off? Of course US’s. Why? Because it accumulated during its last relatively uninterrupted 150 peaceful years (since the civil war) capital in many forms.
The official GDP is only part of this story. The other part is the very existence of well functioning economic institutions like: financial systems, political system supportive to business, well functioning management systems, highly developed stock exchange market, local capital owners who use the capital for economically positive purposes, entrepreneurship in all business sizes and every imagined field of activity, accumulated know how in its universities and other institutions, like for example Google, etc. Add to it the absolute and relative size of US economy, its military power supportive to its currency, and you will understand, that the traditional economic tools, like GDP, or deficits and debts as proportion of GDP are not good enough to measure the strength of the US economy.

  1. The Greek problem seems to be more than just overvalued currency. Greece economic problem was not created when it entered the Eurozone. It started before, and developed after. It was partly caused by unrestrained budget policy of Greek political elites and partly because Greece in reality never developed modern economy, interwoven in European and ex-European economy, except in the tourist industry. Yet the tourist industry based state can provide GDP per capita of tourist location states, like for example the Caribbean states, or Costa Rica but not of Germany, as it was before the crisis in Greece. (About half of the present Greek GDP per capita.
    Let’s compare Greece to Poland, Slovakia and Czech Republic. These three countries became the industrial hub of Europe after 1990. Most of the European, Japanese and Korean car and electronics production industry moved to these countries. Nothing of this kind happened to Greece. Yet before 2010 the Greek GDP per capita was double to these countries. Now they are more or less equal. And this happened in spite of unimaginable terrific social, economic, political, post-communistic heritage. This heritage included not only lack of modern infrastructure, but also unbelievable moral degradation among the old but then also the new leading elites caused by 40 years of communistic despotism and false morals, taught by this regime. But as contrary to Greeks, the people in these countries were ready to take in their hands the new opportunities, sacrificing the present for a better future, and eventually crawled out from the hole, the communistic regimes dag for them for 40 years.
    I am ready to have a bet, who will be better off within few years.


  2. GDP has many problems, including, but not restricted to, being Gross, Domestic and a Product.

    The case of the Greeks becoming rich overnight, as I explained on my site, was a trick used by West German plutocrats in the case of East Germany; systematically massively over-valuing a country’s currency to kill its industry, while it drugging out on West German goods.

    The over-estimate of the Drachma, deliberate at the time, was 100%.

    It’s true that the USA runs a massive deficit, which makes it ever richer. Should a problem arise, the naïve foreigners get basically expropriated.

    The main component of a nation’s economy is indeed the state, defined in the most general way. Integrating all the money transactions, as the GDP does is just the foam of that surf.

    Indeed the money economy is just a play thing organized by the state. It is this play thing that GDP measures.


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