Tuesday, November 13, 2012

A Minor GDP Revision with Major Consequences

The value of national accounting identities in economics and as a means of qualifying the wealth of a nation has recently been a frequent topic of personal discussions. Hence I was excited by Euvoluntary Exchange’s critiquing GDP vs. EE, in which Samuel Wilson takes on the conventional accounting of exports and imports:
Where GDP is usually referenced by economists and the press is as a proxy for the health and vitality of the economy. Higher GDP per capita tends to correlate well with higher standards of living and better material well-being. There are quite a few things folks consider desirable that track well with high GDP, like lower violent crime, longer life expectancy, lower infant mortality, et al. That's great, but if we're measuring prosperity, it seems kind of perverse to ding your metric for exchanges that happen in one particular direction across one particular type of border. By using GDP as a proxy for prosperity, the deck is sort of stacked against the euvoluntarity of international trade, and this is completely independent of any intertemporal, loanable funds considerations. It's almost tacitly suggesting that imports are something we have to suffer for the privilege of exporting. How strange.
I can perhaps understand how economists might want to concern themselves with prosperity maximization. I'm more puzzled by ones who translate this to "GDP maximization".
I'm sort of curious if folks' moral intuitions towards overseas trade would change if some snickering rogue could convince the profession to switch the sign on imports.
GDP is clearly focused on production (given the acronym), yet intuitively one might consider wealth as the amount of obtainable goods and services. The focus on production appears to mesh well with Say’s law, in which production is the means by which individuals can obtain other goods. However, there are numerous reasons to question the validity of Say’s law including the possibility of an excess demand for money. Rejecting Say’s law, one can more readily accept that production is not the only, or necessarily accurate, means of determining one’s purchasing power.

Warren Mosler, a main proponent of MMT and a sectoral balances approach to macroeconomics, presents a similar argument in his book Seven Deadly Innocent Frauds of Economics Policy (p.59 - free pdf version attached):

Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living.
Put more succinctly: The real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it must export.
Wilson and Mosler clearly agree that reversing the GDP accounting sign on imports and exports would more accurately reflect the “real wealth of a nation.” That these two proponents affiliate with generally opposing economic camps, suggests optimism that many others might support this change. The road won't be easy, but reversing the sign on imports is critical to preventing this “deadly innocent fraud” from further reducing our standard of living.


  1. Disagree.

    GDP is a measure of production. This is a reasonable thing to measure -- for instance, as a metric for the mobilizable resources available to the state for purposes of some national priority. (It is not a coincidence that national income accounting as we know it begins with World War II.) The problem is not that GDP is a measure of production, the problem is that people equate production with wellbeing, or with good economic outcomes in general.

    If you want to measure consumption, or total final expenditure (C+G+M+I), that's fine, and yes, there are plenty of questions for which those will be more suitable measures than GDP. The fact that one metric is not suitable for every question does not mean that there is something wrong with it.

    1. Good point.

      The actual issue is not so much with how GDP is defined but rather how it is interpreted as a measure for well-being. Given how integrated that use of GDP is within our society, the example of change as stated above may make more sense to some. However, it would be more accurate and presumably better in the long-run to establish other metrics as similarly suitable to the task of measuring well-being.

  2. Mosler: "Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living."

    Woj, you provide an example of what I dislike about Mosler's thinking. Too brief. Overly simplified. Designed like a sales pitch. And sometimes, carelessly wrong.

    Maynard: "...nations can learn to provide themselves with full employment by their domestic policy..."

    1. Art,

      Point taken. I think Mosler and many other MMTers hold immensely valuable knowledge regarding modern monetary operations/systems but often find myself in disagreement over the policy implications.

      You are correct to point out that the quote is an over-simplification of the basic idea. Trade deficits are presumably not sustainable indefinitely nor would expanding the size necessarily be beneficial, especially in the long-run.

      My view remains that the current obsession with GDP leads to support for misguided policies directed at spurring exports, such as tariffs and currency devaluation. By flipping the story I hoped to point out this misconception, but may have gone to far int the other direction. Thanks to comments from you, JW and others I can clear up my message and clarify my own opinion internally.

  3. "There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage."

    free trade = desperate expedient, I love it.