GDP Provides a False Reading of the State of the Economy

The GDP (gross domestic product) statistic portrays a view that the key driving factor of economic growth is not the production of wealth but rather its consumption

• GDP is a calculation of the value of final goods and services produced during a particular time interval, usually a quarter or a year
• Since consumer outlays are the largest part of the overall demand, it is held by many commentators that consumer spending is the key driver of the economic growth
• However, this framework ignores the various stages of production that preceded the emergence of the final good.

GDP and the Real Economy: What Is the Relationship?

• There are difficulties calculating real GDP
• To calculate a total, several things must be added together, and they must have some unit in common
• The employment of various sophisticated methods to calculate the average price level cannot bypass the essential issue that it is not possible to establish an average price of various goods and services
• Accordingly, various price indices that government statisticians compute are simply arbitrary numbers
• Much of the so-called economic research produces "scientific support" for the viewpoint that monetary pumping can enable the economy to grow
• GDP is a close relative of the money stock
• An economic boom has nothing to do with real economic expansion
• On the contrary, a boom leads to real economic contraction
• A strong real GDP growth rate likely depicts a weakening in the process of wealth formation

Why Do We Need Information on Economic Growth?

• In a free economy, this type of information would be of little use to entrepreneurs
• The only indicator that any entrepreneur would rely upon is profit and loss
• Under these conditions, no businessperson can ignore the GDP statistic since the government and the central bank react to this statistic by means of fiscal and monetary policies
• By means of the GDP framework, government and central bank officials generate the impression that they can navigate the economy
• Whenever the growth rate slips to below the outlined growth path, officials are expected to give the "economy" a suitable push
• Conversely, whenever the economy is growing too fast, they step in to cool it off

Conclusion

• GDP statistic provides an illusory frame of reference to assess the performance of government officials
• Movements in GDP cannot provide us with any meaningful information about what is going on in the real economy
• A strong GDP growth rate in most cases is likely to be associated with the intensive squandering of the pool of wealth

 

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