Are Traditional Measures of Economic Growth Incomplete?

Among the national statistics published by the U.S. Bureau of Economic Analysis (BEA), gross domestic product, or GDP, is instantly recognizable as a trusted measure of economic growth. Indeed, GDP is generally regarded as an authoritative metric that policymakers, analysts, and countless other decision makers can rely on. Given its prominence as a high-profile indicator, it’s reasonable to ask if GDP provides a clear and complete indication of economic activity at street level ¾ — that is, as the economy is experienced by everyday members of society. Does GDP help us understand economic progress as it is experienced in people’s daily lives, or does it reflect economic activity only as a matter of dollars and cents? Charles R. Hulten and the Philadelphia Fed’s Leonard I. Nakamura examine these and similar questions in their working paper, “Is GDP Becoming Obsolete? The ‘Beyond GDP’ Debate.”

They begin by asserting that GDP should encompass a broader value of economic output, one that includes gains (or losses) in softer, subjective measures that speak to societal well-being. Their position supports work at the BEA that explores these types of economic readings — an effort referred to as the Beyond GDP initiative. The initiative is gaining traction, the authors say, pointing out that scholarly debate about enhanced GDP measurements is quite active: “The literature continues to grow, driven by questions about GDP as a suitable measure of aggregate economic welfare.” This fertile environment of inquiry and discussion is important, the authors say, because “the growth rate of GDP has come to be regarded as virtually synonymous with economic progress,” and “the Beyond GDP movement seeks to correct this perception.”

The economists then introduce their novel way of accounting for the nonmonetary benefits that accrue to consumers. Their method relies, in part, on showing how the accounting framework of modern-day GDP “can be built out to include additional sources of utility.” They build on foundational research published by the economist Kelvin Lancaster in 1966, which characterized consumption as more than a mechanical exchange between buyers and sellers. Consumption, Lancaster proposed, is a transformative process in which a product or service usually yields a value greater than the sum of its parts (that is to say, greater than the amount of money that changes hands). For example, a walk in the woods with a friend may have more value than the monetary cost of getting to the trailhead. Hulten and Nakamura focus on consumption technologies that we use to transform the goods we buy into what we actually participate in, invoking Lancaster’s appeal to recognize goods and services not just as the dollar values they represent, but also as real contributors to consumers’ well-being — in subjective, quality-of-life ways.

Recent history, the authors explain, offers vivid examples of developments that substantially increase well-being. They review several of these important contributions, noting that they appear broadly across different sectors of the economy. This includes health care, a vast sector whose many products and procedures generate benefits that go far beyond dollar value. Vaccinations, for instance, stoke economic activity while engendering a type of well-being that is less apparent in dollar terms: A vaccinated population is able to keep the economy humming (resulting in monetary output), and it is also better able to socialize and pursue other activities that enhance the quality of life.

Examples of nonmonetary welfare are likewise identified in the realm of information services. The paper relates how the arrival of the Internet Age, with its tremendous flow of information, has brought the masses instant benefits, much of them free of charge. Across so many of life’s activities, people can retrieve information nearly at will, and their well-being is arguably better as a result (not least because they are equipped to make better-informed decisions). However, the welfare effects of modern communication tools, and the benefits they bestow, are not reflected in traditional measures of economic activity.

The authors also point out that GDP ignores economic “bads,” such as developments that contribute to climate change. These types of unsustainable economic activities should be counted as reducing our country’s natural capital (an endeavor for which a measurement strategy that Nakamura contributed to was recently announced by the White House).

Hulten and Nakamura acknowledge that introducing new ways to measure GDP is a delicate matter, one that should be approached with care. Their goal, they say, is to maintain a balance between traditional interpretations of economic output and newer approaches that account for social welfare. Neither should be elevated over the other. Instead, they call for a balanced, inclusive, and forward-thinking effort to fold additional sources of well-being into conventional notions of economic value.

There are many complications within the U.S. national accounting system economists use to calculate GDP, and the authors aim for a simplified way to account for them, especially within the context of measuring societal well-being. They diagram the flow of resources within a simplified model economy, pinpointing how the economy generates higher utility for consumers without necessarily using more resources (or inputs, such as labor and capital) — that is, an economy that yields more “utility bang for the GDP buck.” The economists also discuss practical ways to incorporate this efficiency gain into the larger GDP accounting framework, primarily by sorting this extra welfare into an experimental account they refer to as a satellite account. “There is a well-established precedent,” they write, “for using the satellite approach [to incorporate] diversely sourced data into the accounting system.”

Throughout the discussion of their conceptual framework, Hulten and Nakamura make plain that their ideas are ambitious, and they address several realities that might complicate or compromise the viability of their approach. “There is a lot to sort out,” they say, reminding us that the real world sometimes defies the relationships depicted in economic models. There are, to be sure, challenging considerations. “Are value judgments even quantifiable?” What about measuring “subjective values across different cultures, traditions, religions, ideologies, and periods of time?” In addressing questions like these, and in showing that a more-inclusive — but still imperfect — method of GDP measurement can be practicably implemented, the authors strengthen the case for their proposed solutions. As they reiterate throughout their paper, new ideas about GDP (even if they have weaknesses) “should not be ignored.”