What's Missing from GDP and Why Does it Matter?

Tomorrow’s fourth quarter GDP release will likely show a growth rate of around 1.1. percent, a substantial slowdown from the third quarter rate of 3.1 percent. Economists will report that this means the economic growth is slowing. Yet, as we ask continually, what is actually being measured by GDP? A new Demos Explainer explores this issue and looks at what is measured by GDP and what is missing. As highlighted, GDP provides a good overview of raw economic activity. It is not, however, a measure of overall economic progress. For example, GDP has steadily increased since 1967 -- so has inequality. Increasing inequality is actual an indicator of poor overall economic progress as more gains go to fewer people. Yet, GDP cannot capture this reality.

 GDP also provides justification for a singular focus on growth, regardless of environmental or social consequences. Natural resources only count in GDP when they are used. The value of preserving trees as carbon sinks, for instance, is not reflected in GDP, whereas the sale of timber is. Yet, as we face the increasing threat of climate change, the value of trees as carbon sinks to help mitigate greenhouse gas emissions may be greater than their value as timber. GDP does not reflect this reality and by over-relying on GDP, policymaking is skewed towards promoting growth, rather than progress.

As we’ve highlighted, alternative metrics like the Genuine Progress Indicator provide a more complete picture of economic and social realities. Plotting GDP growth versus GPI shows how limited progress has been since 1960.

Shifting to metrics like GPI allows policymakers to have the data needed to make better decisions. As inequality brings down the overall GPI, reducing it becomes a priority and makes policies like more progressive taxation and pro-worker protections more attractive. Similarly, as GPI takes the value of natural resources into account, environmental preservation becomes a priority in a way that is not possible when relying only on GDP.

The need for alternative ways of measuring progress is best summed up by Joseph Stiglitz when he stated, “What you measure affects what you do,” and if “you don’t measure the right thing, you don’t do the right thing.”