Arriving at GDP as a Community’s Productivity Measure of the countries of the world are often in the news. The term productivity can be measured in different ways – by financial economics, by social economics (including direct and indirect effects), and other methods.
Present indicators of productivity include gross domestic product (GDP) and gross national product (GNP). Such measures may indicate present status at any given time, but what is challenging is to measure the “potential” of a country’s effects – which could be positive or negative. For example, what if a nation has environmental hazards but a very productive economy otherwise (which could result in impact in the future upon the community in terms of health hazards which in turn affect the people which in turn affect the economy), or a very strong military capability of usurping/controlling other economies in the future (although presently its GDP is not as high as it potentially could be) if unchecked? These are present shortcomings of the measurements of GDP, GNP, and other such measures – but as far as economies go, the goods and services produced are a reasonable starting point (though not being all the story). In this report we consider the more traditional of national productivity, with brief consideration of internal governmental incentives, and touch upon the social impact factors (which can be elaborated in subsequent report(s)).
The history of GDP determination extends back to Simon Kuznets for the U.S. Congress in 1934. Since that time, GDP prior to 1830s has been calculated by Angus Maddison. The manner in which GDP is determined, including three variations presently used (and stated under the “Present” section), has undergone multiple revisions.
Present-day GDP Measures
Three methods presently used for GDP determination include:
- the product approach –the difference between gross value of domestic output from different economic activities and the cost of goods sold, effectively yielding an analog to the gross profit on the income statement, with important caveats of adding in tax and deducting subsidies (hence determining the “gross value added”):
- the income approach – compensation of employees + gross operating surplus + gross mixed income + taxes – subsidies (or GDP = R + I + P + SA + W);
- the expenditure approach – GDP = Y = C + I + G + (X-M) or consumption + investment + government spending + (exports – imports)
Gross National Product (GNP, also know as Gross National Income) is determined by calculating the data for all U.S. businesses, whether domestic to U.S. or abroad in terms of their doing business. The U.S. GDP was favored over GNP in the past 2.5 decades.
Corrections to the GDP over given years can be made by correction for inflation (using what is known as the “deflator”) – a measure of the consumer price index (CPI) determines a “basket of goods” price, which can be compared year-on-year (YoY); however, by extending beyond simply consumers’ baskets (to nations’ baskets), the deflator is further-reaching. Corrections for inflation and some other variables is to be implicit in this calculation. In addition, comparison of such standardized GDP for a given nation vs. other nations can be normalized in this manner; in addition, a concept of “purchase price parity, or PPP” utilizes a standardized measure for a given country (for example, maybe bread is cheaper even given a standardized cost of living in Poland vs. United States vs. India, so each can be evaluated accordingly with PPP, on a YoY basis). Similarly, exchange rates for currency can be used, although more susceptible to other confounding issues. Hence, as the rule implies that “good data in, good data out,” it becomes a question of what one is looking to find.
Productivity Measurement Beyond GDP
While the GDP is a good measure of domestic productivity in many regards, critics have argued that it cannot necessarily measure other aspects which deserve measurement – these include “externalities” such as wealth distribution, non-market transactions, transactions outside the measured market/underground economy, asset values (despite depreciation, other items such as intangibles are difficult to value), innovation (unless resulting in a presently measured variable), rebuilding after natural disaster (though progress will be shown, destruction may not be accounted for), future progress infrastructure being arranged (but not reflected in actual gains yet).
In order to address at least some of these concerns, other indices have been proposed. For example, a “Genuine Progress Indicator” or GPI performs the same calculations as GDP but subtracts for crime and pollution; the European Quality of Life Survey assesses subjective life satisfaction (time, loving, being, having); and even Gross National Happiness and other measures evaluating satisfaction and happiness have been proposed. Governance issues, social progress, and general happiness have been in the more recent proposals.
Harvard Business Review, in one of its articles, discussed the work of physician Hans Rosling from Karolinska – in his TED talk (ted.com, accessed specifically here at
https://hbr.org/2012/01/the-economics-of-well-being/ar/1, he notes the variable of child mortality and correlates it to wealth of a country – specifically stating as paraphrased here, that the growth of a country is “much better, and correlated with improved wealth…but you “can move much better if you are healthy first than if you’re wealthy first.”
Separately, Michael Porter, known for his work on strategy, noted a Social Progressive Index (SPI)…outlined under http://www.socialprogressimperative.org/data/spi — it accounts for basic human needs (nutrition/medical care, water/sanitation, shelter, safety); Wellbeing (basic knowledge access, information/communications, health/wellness, ecosystem sustainability); and opportunity (personal rights/freedom/choice/tolerance/inclusion, and access to advanced education). Perhaps following Maslow’s hierarchy of needs (simplypsychology.org) of physiological, safety, social, esteem, and self-actualization, this may be country psychology-specific and reveal future behaviors.
Hence, several alternatives have been proposed to determine the “standard of living” of a country or community – while, as Rosling points out, we must look at each part in the sum of the parts, such measures help understand not only where communities are today, but where they have been and where they may go if trends are followed.
(Portions of this text are from sources of the internet, which may include Harvard Business Review via hbr.org, investopedia.com, triplepundit.com, socialprogressimperative.org, ted.com, simplypsychology.org, wikipedia.org)