December’s GDP report does not tell the truth

Contributed by Joe Montero

The Australian Bureau of Statistics (ABS) released the latest quarterly report yesterday, saying that Australia’s Gross Domestic Product (GDP) grew by 1.1 percent in the October December quarter. This means that we are not in an official recession, because the number was not below zero. The definition for a recession is that there must be below zero growth for three successive months.

But is the economy really growing? The GDP measure is increasingly coming into question, as an accurate measure of growth. It measures business transactions, which are all the goods and services purchased, irrespective of what they are.

Growth means that something that wasn’t there before has come into existence. If something is sold and then resold, it has only come into existence once, but is measured twice, because there have been two sales. In this way, GDP double counts and inflates the result.

As telling as it is, this sort of  double counting is only a small part of the problem. To understand growth, and indeed, economic activity as a whole, it is necessary turn to the seemingly illusive concept of value. The value of something is the measure of how useful it is to us. If we use this as the criterion, growth is the creation of more usefulness.

How is this materialised? By transforming what nature provides into something that is more useful. A simple illustration will help to explain this. Some wheat is growing on a piece of land. A person comes and takes the seed and transforms it into flour. Flour is more useful than wheat seed, because it can be turned into all manner of other things. Another person takes the flour and bakes a loaf of bread. Again, something more useful has been created. Both cases have added to growth. Not because there were transactions, but because value has been created.

The concept of GDP was invented in 1834, by an American called Simon Kuznets, who measured it in terms of all the goods and services produced in a given period of time. Kuznets warned that it was an incomplete picture. This part has not been taken any official notice of and the measure made even more inaccurate, by substituting to a number of transactions equivalent.

The most glaring flaw is that it represents financial transactions as growth. A financial transaction creates no new value. All it does is transfer the ownership of an already existing asset. A good example is debt. A bank loans out a sum of money to someone who then has to pay it back with interest. The interest is counted as growth. It is not. This is a transfer of money, not the creation of new value. The GDP measure does not make the distinction.

If the money borrowed is used to build a new house, new value has been created in the form of a new house. The new house will add to GDP. Here’s another problem. Since the bank transaction is recorded too, the problem of double counting props up again and the false notion that transfer of funds is growth. The fallacy of this is demonstrated by the fact that at any time there is only a given amount of money in circulation. If you go to the bakery and buy a loaf of bread, yo do not create money, but transfer it from one hand to another. Financial transactions should not be included in a measure of growth.

Similarly for the service industries. As a whole, retail passes on ownership, but no more. Retail is necessary for the economy to function, just as finance is. Necessity though, is different to growth.

The transactions for the December quarter totaled some $423 billion. Even taking it on the terms of the official GDP, the stated growth was mainly due to a higher price (up 9.1 percent for the quarter) for Australia’s mineral exports and that households spent more (1.2 percent) to keep at the same level (expressed as a fall in household sayings ratio measured at 1.1 percent. If these are taken away, because they represent money transfers, rather than growth, even without considering the role of financial transactions, the growth in GDP evaporates. Ad that Australia continues on a downhill longer-term trajectory.

A new measure for measuring growth is needed. With an accurate picture, governments are able to plan better. The citizens can be better informed and be armed with the capacity to react appropriately









1 Comment on "December’s GDP report does not tell the truth"

  1. This is a very understandable, very clear explanation of the situation. Are the powers that be deliberately bullshitting us or are they just ignorant? I fear the former is true.

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