Sunday, April 27, 2014

Beyond GDP: a new measure of growth

Since the 40s, GDP  measures output from the 'use' side , that is the  value of all 'final' goods and services used by consumers, businesses and government. It gives a biased view of the economy as it neglects the role of intermediate goods. 

The US Bureau of Economic Analysis has launched the 'gross output" measure to measure the total value of sales in all phases of economic activity, from raw materials, intermediate goods to final products. This measure was introduced by Wassily Leontieff in the 30s at the level of individual industries , but not as an aggregate measure. One of his disciples, Mark Skousen, presidential fellow at Chapman University and author of the book "Structure of Production" (New York University Press 2007) argues that this is a more reliable measure of total economic activity. In his view, the traditional measure of GDP has contributed to the idea that consumption is the real motor of the economy, as it represents more than two-thirds of it and that savings are unproductive. In fact, economic activity in the intermediate stages of  production - including capital formation, technology and business spending - is largely underestimated. The new measure  also provides a better understanding of business cycles. Nominal US GDP fell by 2% while gross output declined by 8%; conversely, it has risen faster than actual GDP . 

The question is what could be the consequences on the other economies in Europe and Japan, if gross output is generalized. Since gross output emphasizes the 'make' economy rather than the 'use' economy, it gives more weight to capital investment, innovation, entrepreneurship and productive savings. This indicator will  'reward' countries like Germany or Italy which have a tradition of manufacturing and a high propensity to savings (despite it has been hardly affected by the crisis). Therefore, economic policies will tend to focus more on production rather than purely on demand stimulation, which is not to be neglected, though.. 

It is certainly a decisive step forward to a better measure of growth. However, it is still not a radical reform like the measure proposed by Stiglitz, Sen and Fitoussi,  focusing on quality of life rather than on material components of wealth. 

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