Thursday, 9 December, 2010

Paradox of using Money to measure GDP

Paradox of using Money to measure Gross Domestic Product

Take a look at this interesting quote from Kennedy:

"Our gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors, and the jails for the people who break them. It counts the destruction of the redwoods, and the loss of our natural wonder in chaotic sprawl. It counts napalm, nuclear warheads, and armored cars for the police to fight the riots in our cities. Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile." Robert F Kennedy

How true? All the more so in the Indian context.

For the limited purpose of looking at overall financial position of the national economy, perhaps, the GDP is a useful tool.

However, the GDP hides much more than it reveals:

  • The GDP perfectly hides disparities across different sections of society based on age, caste, gender, geography, educational background, physical well-being, etc.
  • The GDP fails to give a clue on the real purchasing power of the average Aam Aadmi in real terms, vis-a-vis
    • What he used to purchase a year or a decade back
    • What people from other countries can purchase today (as well as what they could purchase a year or a decade back)
  • The quality of life in terms of satisfaction, happiness, peace of mind remains completely unknown
  • The GDP increases when we spend money on:
    • Sending a satellite to the moon
    • Building a 27-floor tower for the residence of a rich industrialist
    • Buying more guns to fight the maoist / naxalite problems
    • Buy more bullet proof cars for our netas
    • Pay salaries to our CBI officials to investigate and find in-depth details about the plethora of scams
    • Shooting for a movie like "Robot"
    • Lawyers to fight divorce cases in a family court
    • Doctors and hospitals to try and cure a lung cancer or a throat cancer (which was acquired due to chain-smoking, which, in turn, added to the GDP as well)
    • De-addiction centres for drug addicts
    • Holding public meetings with a plethora of politicians, National telecast of debates, etc. on some current scam.
    • Holding a seminar at Delhi and allow people to express anti-national views
    • Filing a case and investigating whether the law was violated by speeches made in the seminar referred to above
    • Drinking and dancing in liquour bars
    • Moral policing objecting to such activities
    • Security arrangements to prevent vandalism during such moral policing
  • We simply have no idea about the quality of the GDP in terms of:
    • Whether the growth in GDP is sustainable
    • Whether the growth in GDP is coming from money spent on alcohol or on education
    • Whether the growth in GDP is being inflated by Keynesian principles (of paying someone to dig a road and paying another to fill it up)
    • Whether the growth in GDP is being purchased from the future generations by focussing on current consumption at the expense of infrastructure development
    • Whether the growth in GDP is due to inflation or due to increase in real production of goods and services

Hence, while the GDP is a necessary and very useful unit of measurement of how we as a nation are faring in financial terms at a macro level, we must be conscious of the limitations of the same. Further, we must refrain from using the GDP to obfuscate real problems of India and Indian citizens.

Regards,

N


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