GDP doesn't tell whole story of an economy

Last Saturday's report (Economy's health: Call to look beyond GDP) rightly pointed out a mis-assumption in economics.

Gross domestic product (GDP) is the ultimate macroeconomic concept. It sizes up the total output of an economy, not by measuring the amount of goods and services that are produced but by measuring the money spent to buy these things.

GDP is a fantastic accounting tool, but it does not reveal anything about the underlying dynamics - what is going on in the belly of the economy - to get that result. It is devoid of any cognitive value.

GDP looks only at the surface, that is, the value of the final goods and services that are produced. It does not reflect how a commodity (for example, coal, iron, wood, wheat or copper) is churned through time over different stages of production and with various capital goods, into what eventually becomes houses, cars, books, a meal in a restaurant, skateboards and so on.

It is under the surface that the real action in an economy takes place. Looking only at the surface means we ignore what may go wrong and innocently conclude that all is OK.

Recall the iconic poster from Steven Spielberg's 1975 blockbuster movie Jaws. A girl goes for a swim, but a big shark lurks below the water surface.

The message is that although GDP declares that all is well, never forget what may be lurking under the surface.

Bart Remes

A version of this article appeared in the print edition of The Straits Times on June 19, 2018, with the headline 'GDP doesn't tell whole story of an economy'. Print Edition | Subscribe