Gross domestic product, or GDP, has long been the standard for measuring economic growth and progress. But there is a growing debate about whether GDP is a yardstick for well-being or can keep up with changes in our economy.
Nakamura’s work examines
how to measure today’s economy.
As the Bureau of Economic Analysis, the U.S. agency responsible for GDP accounts, pursues its GDP and Beyond program, we spoke to Leonard Nakamura, emeritus economist in our Research Department. As part of the Fed’s efforts to inform policymakers and other decision makers and ensure a strong economy, Nakamura and his coauthor Charles Hulten developed the concept of expanded GDP, or EGDP. The metric can serve as a complement to GDP that better captures overall well-being and our standard of living.
Q: Your research looks at how well GDP captures the economy. How did you become interested in this topic?
LN: In the early 1990s I took my two-year-old son to a store for educational toys, and he was able to play on a computer. Of course, a two-year-old playing on a computer these days is standard operating procedure, but it got me thinking that computers have really changed the way all of us interact with the world. I became curious about where to find new consumer products like computers and their impacts in the data.
I also became aware of the heightened importance of research and development, or innovation, which is increasingly at the heart of our economy. At that time, investments in innovation were not included in our economic aggregates. That started me and many others along this process of asking, how can we change GDP to keep up with the economy?
Q: Could you tell us a little bit about the debate about whether GDP is an outdated metric?
LN: GDP is all about transactions, but not everything is transacted; many things our economy provides are now free. One question is, can we expand GDP in ways that bring us closer to a measure of well-being that does a better job of counting innovation, or a better job of counting bad things like hurricanes or pandemics? Or should we look to other measures, like measures of happiness or access to education? That's really the basic debate about whether GDP is outmoded or whether it can be updated in a way that better fits the modern economy.
Q: Your research focuses on externalities (when the production or consumption of goods and services is not reflected in prices). Could you talk a little bit more about these?
LN: Externalities are unintended consequences. One kind is the long-term environmental sustainability of our economic activity. Another kind of externality is information. In the mobile app internet, information flows to us at zero cost through our smartphones, laptops, or tablets, and those things have a lot of value. For example, Google's product, according to GDP, is advertising, but the externality is free search of the Internet. The resulting information can have great value, but it doesn’t fit into GDP.
Q: In a recent paper, you pose a question: “Has economic progress become harder or has progress become harder to measure?” What does that tell us about today’s economy?
LN: One example is that, over the last 15 years, our data suggest that the pharmaceuticals industry has been falling in terms of productivity. Yet, we know that mRNA vaccines saved millions of lives during the COVID-19 pandemic. Isn’t that a big boost in productivity? But our statistics don’t measure that value. We just ask, what did they cost to make and how much were they sold for?
Another example is photography. We use our phones to take pictures and we transmit them for free, so the data look as if photography has become very unimportant, but we know that it actually plays a bigger part in our lives than ever.
Q: The metric that you came up with for EGDP measures the value of something that consumers get for free. How do you calculate that?
LN: You use estimates that people make about the value of different products. You can ask somebody what something free like YouTube was worth to them. If shopping on the Internet saves you time because you don’t have to drive to the mall, the value of your time saving is another measure you can use. But you can also get an idea by asking, what would I have paid before? With photography, if I took 1,000 photographs this year, in the past that would have cost me, say, $500, so that’s what the photography was worth.
Q: You have another concept, E-wealth, that you call “the intertemporal counterpart of EGDP.” What is it and how does it help us determine sustainability?
LN: Sustainability has to do with how we use nature and how we impact what nature provides us: for example, a comfortable place to live, clean water, breathable air, and recreational activities. The valuation of that is part of E-wealth, and sustainability is whether that valuation is rising or falling.
You’re not going to capture all of the infinite value of nature, but what we can count from our economic uses of it, that's finite. To the extent that we are doing something that's nonsustainable, that is a subtraction from our wealth, and a subtraction from expanded GDP.
Q: If I'm a policymaker, what information can I get from EGDP that is different than GDP?
LN: GDP tells us about the resources, including labor and capital, that we have at our disposal in monetary terms. EGDP, hopefully, will tell us more about what we want to have happen.
When we evaluate policies, we often ask the question, how much is this going to cost us in GDP? But if one policy is more sustainable than the other, then it’s going to look different in terms of EGDP than it will in GDP.
Q: What's next for your research?
LN: I'm thinking about how to include climate and weather disasters in GDP. You can see clearly that the cost of these disasters has been rising rapidly, doubling every 12 to 14 years. When we have a climate disaster, that is, to a large extent, an acceleration of loss of capital. I think that ought to be included in subtractions from GDP. Because otherwise, in the wake of a disaster, we rebuild. Rebuilding is positive in GDP, and it will look like we’ve got more assets such as housing when all we’ve done is get back to where we were before the disaster. This pushes us to look at net domestic product, which subtracts out capital losses from GDP and is a better measure of well-being because of that.
The views expressed here are those of Leonard Nakamura and do not necessarily reflect those of anyone else at the Federal Reserve Bank of Philadelphia or the Federal Reserve System. This interview has been edited for length.