GDP change.docx

Redressing Gross Domestic Product: Is that the way ahead ?

Recently the United States of America (US) decided to rewrite the financial history of the work. The US decided to change the way it interprets the term Gross Domestic Product (GDP). It has decided to switch to a new definition of GDP which may make its GDP look rosier and probably redress its financial statements. After the introduction of this new policy (July 2013) American books are going to be re-written right from 1929. How will it affect us and what is the strategy of US behind this new definition is what we are going to discuss in this article. The US introduced the concept of Gross Domestic Product just after Second World War when the IMF and World Bank were setting up. The US was the guiding economic power in the world at that time. It helped set up the Bretton Wood system and standardised the economic indicators in all countries by the introduction of the term GDP. However, it seems that America has seen a need to redress its definition of GDP. America no longer remains the driving economic factor of the world. Recent economic crisis of 2008 has exposed its vulnerabilities to the world and to its own people. By changing the definition of GDP how it proposes to build its name is a thought to ponder upon. For the last sixty years since the introduction of GDP, it has been used as an important indicator to measure the level of economic activity in an economy. It has become such an essential part of the economic jargon that today every economy be it a growing one or a backward one measures their economy in terms of GDP. Developing countries like India and China completely rely upon the targets they set in terms of their GDP growth rate. Similarly the crisis level in the Euro zone countries is also measured as a fraction of their GDP. People use the terms GDP and economy interchangeably today. Inherently, the GDP of any country measures the market value of all the goods and products produced in an economy. There are broadly three defined methods to calculate the value of GDP. GDP can be calculated as defined above by adding the entire value of all the goods and products produced in the economy. It can also be calculated by an expenditure approach and the income approach. Expenditure approach considers that all the goods produced in the economy are in some way or the other utilised within that economy. Henceforth measuring the expenditure within the country helps in calculating the GDP of that country. Similarly income approach measures the total income of all the producers with in the country. Gross Domestic Product was an indicator to calculate the entire production of the country. It was never supposed to be so wrongly used as an indicator as it is done today. Measuring the economic growth has more to do with the social development than its economic counterpart. GDP has a myopic approach in which it defines the growth of an economy. It does not talk about the real growth. It does not talk about the literacy rates or rising levels of employment in an economy. It talks more about industrial production. Even though the GDP of a country may reflect it in economic terms but it is never able to estimate the exact amount that is spent on each individual in the nation. As a hypothetical illustration, if we assume that GDP measures the amount of electricity used in a house then it doesnt focus on whether the electricity used is actually put to a beneficial use or not.

The case of US rewriting its method to define GDP is a classic example of how much importance countries give to GDP. The recent declaration of the US to change the way it is going to calculate GDP speaks about the inclination of American government to redress its financial blunders and probably to put up a rosier picture. The American government has decided to add all the intangible assets into its GDP numbers. The implications of the above decision are enormous. Intangible assets include the money spent on making movies, research and development. Previously, the money spent on research and development was used to feature in the form of products that were sold when the research team were able to derive one. However, with the current choice of definition all industries are going to look pretty different from what they look now. It is estimated that more than 400 billion US dollars would be added to the American GDP. This is nearly a 3% jump in the GDP numbers. To visualise it in a much better sense, adding 400 billion USD to the current size of American economy is like adding a country like Poland to its existing economy.

What this redress is going to do to the American economy is interesting. It will put a much better picture of the current state of its economy. Individual data of all the industries would state that the country is advancing at leaps and bounds. America is currently standing at a debt to GDP ratio of about 107. Putting an intangible asset of about 400 billion USD to its GDP value would definitely change the way world and its own people will perceive the American economy. It is proposed that the debt to GDP ratio of the American economy would come under 100 after the inclusion of intangible assets to its GDP. American government is definitely going to reap loads of benefit by the new picture that it is going to portray in front of the world. In reality, this change is not actually beneficial to anyone. It may delay the current problems of numbers but would definitely leave a big question mark for its future. Though, US may have tried to catch up with its debt through this new methodology but this whole beautification is not going to stay for a much longer time. Its debt will catch up sooner or later and at that time America would definitely be in a much greater fix. Today the world progress is defined more in terms of GDP numbers rather than the sustainable provisions made for people in the third world countries. Though, America may have been able to portray itself on a higher success rate but in terms of true growth rate this is mere eyewash. GDP is never going to be the right indicator of economic growth. It is never going to be an exact parameter when it comes to the quality of lives of people. It will always remain a mere indicator of the levels of production whether we include intangibles assets or not. This insight should be a food for thought for everyone. What kind of standards do we have to set to bring in the human index into the definition for growth??