This book explicates the story of the gross domestic product, making sense of a statistic that appears constantly in the news, but one that few understand
GDP: A Brief But Affectionate History
Princeton University Press
THE CHANGE in the GDP figures for the year 2014 fluffs them up considerably. The explanation for this phenomenon is attributable to the change in the base year of computation. National accounts data now build on 2011-12 as the base year for the series over the previous base year of 2004-05. (2012-13 GDP growth old series 4.5%, 2013-14 GDP growth old series 5.5%, 2012-13 GDP growth new series 4.9%, 2013-14 GDP growth new series reflects a growth figure of 6.6%). This seems to suggest that the economic recovery began earlier and is stronger than expected.
The ministry intends to follow international practices and report GDP numbers in terms of market prices, reflecting the demand components, consumption investment, government expenditure and trade. The buzz around the new numbers and the lively debate engendered led me to return to an interesting book that promised answers to the GDP puzzle. The questions the book poses and answers it posits revolve around the esoteric GDP. How did the size of the US economy increase by 3% on one day in mid-2013, or Ghana’s ballooned by 60% overnight in 2010?
Why did the UK financial industry show its fastest expansion ever at the end of 2008 just as the rest of the world’s financial systems were seized by rigor mortis? Why was Andreas Georgiou, Greece’s chief statistician, charged with treason in 2013 for doing his job, trying to accurately report the size of his country’s economy? This short and sweet book details answers to all these questions and explicates the story of GDP, making sense of a statistic that appears constantly in the news, business, and politics, in point of fact almost seems to rule our lives—but one that few understand.
For intellectuals with a historical bent of mind, the book, through its 168 pages and six chapters, traces the development of national accounting from the 17th century to the establishment of GDP and its metaphorical rise and fall in the 20th and 21st centuries. After a brief introduction to the conceptual underpinnings of GDP, chapter one traces the history of national accounting from the 18th century to the 1930s through the sad period of the War and the Depression. Chapter two explores the Golden Age from 1945 to 1975. Chapter three details the legacy of the 1970s, a period mirroring the crisis of capitalism. The next chapter is devoted to the period spanning 1995 to 2005, the new paradigm. Chapters five and six deal with our times, the Great Crash and the future 21st-century GDP. This wraps up the book, though one needs to appreciate the extensive scholarly notes on all the references. It is amazing that in just 168 pages, Diane Coyle provides a synoptic overview tracing the history of this artificial, abstract, complex, but exceedingly important statistic from its 18th- and 19th-century precursors through its invention in the 1940s and its post-war golden age, and then through the Great Crash, coming up to speed to the present. The reader learns why this standard measure of the size of a country’s economy was devised, how it has changed over the decades, and what its strengths and weaknesses are.
The book explains why even small changes in GDP can determine the zeitgeist of nations, decide elections, influence major political decisions, and determine whether countries can continue running deficits or be mired in the gloomy troughs of recession. The book ends on a realistic, though sombre note that GDP was a good measure for the 20th century, but is increasingly inappropriate for 21st-century economies driven by innovation, services and intangible goods. For a long time, concerns have been flagged about the adequacy of current measures of economic performance, in particular those based on GDP figures.
Moreover, there are broader concerns, as these figures are clearly not a metric of measures of societal well-being, as well as measures of economic, environmental, and social sustainability. Nevertheless, they are rewarding figures, which tell us where we are and enable us to estimate the distance to where we wish to be. In that sense, it is heartening to know that the GDP is growing at a steady clip. As William Edwards Deming, the noted American statistician, famously said, “In God we trust, all others must bring data.”
As all analytics are data-driven, it is of paramount importance that we are not delusional (pleasant, though it may be), but rooted firmly in data on GDP.
By Deepali Pant-Joshi
Deepali Pant-Joshi is executive director, Reserve Bank of India, Mumbai. Views expressed are personal