Innovation Innovation

GDP: Falling Short

Gross domestic product, or GDP, has been used to measure growth since the Second World War when economies were all about mass production and manufacturing. In this podcast, economist Diane Coyle, says GDP is less well suited to measure progress in today’s digital economy.

“I think the issue for GDP comes if the pace or scope of innovation is changing as much as it seems to be at the moment,” says Coyle. “So, that gap between what we’re measuring and the welfare effect seems quite large.”

Coyle, Professor of Economics at the University of Manchester in the United Kingdom, says while economists argue GDP was never meant to measure welfare, nearly everyone assumes it does just that.

“GDP is shorthand for welfare,” says Coyle. “So, if it’s becoming a less good indicator, that really matters.”

Another aspect of the economy that Coyle says GDP misrepresents is productivity. With all the technological advances in recent years one would expect that economies have become more productive. But GDP suggests the opposite is true. Coyle refers to this phenomenon as the productivity puzzle and says the mismeasurement of digital activities within the economy has a lot to do with it.

Coyle also emphasizes the role of official statistics in measuring productivity and growth. She says companies that are making huge profits from mining big data have a responsibility to share their data with governments. Because the purpose of official statistics is to enable governments to better run their countries.

“It’s part of the social contract,” says Coyle. “If you are a successful company taking advantage of the legal system, the infrastructure and public facilities in a country, then it’s just part of the deal that you cooperate with the statistical agencies.”

You can listen to the podcast HERE

You can also watch the webcast of Diane Coyle speaking at the IMF Statistical Forum on Measuring the Digital Economy.

Diane Coyle is author of GDP A Brief but Affectionate History