Read the article and decide if the author is trying to prove that

a) GDP is still the most  accurate indication of the economic health of any country;

b) it is time policymakers ditch GDP as a gauge of a nation’s production because GDP statisticsare so prone to constant and substantial revision;

c) policymakers should not focus on GDP only but should rather devise a more complex and balanced welfare benchmark.

2. Find the words, which match the following definitions:

· any kind of action involved in conducting business, or an interaction between people
· a mistake or shortcoming in a plan, theory, etc. which causes it to fail or reduces its effectiveness
· usually untraceable, and hence untaxable, business dealings that are not reflected in a country's GDP computations
· the preoccupation of society with the acquisition of consumer goods
· the length of time that someone is likely to live
· the death of children under the age of one year
· materials or substances occurring in nature which can be exploited for economic gain
· economic activity operating with the primary intention of minimizing all forms of environmental impact
· availability of resources and presence of conditions required for reasonably comfortable, healthy, and secure living
· a specified figure that is set for achieving or exceeding within a specified timeframe
· responsibility to someone or for some activity
· capacity to operate or to be sustained
· continued development or growth, without significant deterioration of the environment and depletion of natural resources on which human well-being depends

 

Every quarter the financial markets wait eagerly for the latest estimate of the size of the American economy, dubbed gross domestic product or GDP. Politicians are judged by their ability to get this number rising; a sharp fall in GDP (a recession) is seen as a crisis.

At the beginning of the 20th century people had no way of measuring the volume of economic activity. But the Great Depression and the Second World War made politicians realize that it was essential to generate such numbers. A brilliant and resourceful economist called Simon Kuznets devised a way of doing so. In the process, he, and those who followed him, had to decide what to measure. Understandably, they focused on monetary transactions.

In a new book, “The Little Big Number: How GDP Came to Rule the World and What to Do about It”, Dirk Philipsen, an American economic historian and environmental advocate, argues that this approach has distorted our view of society and the economy ever since. Wash your own windows and GDP is unaffected; employ a window cleaner and output is boosted. Smash your car on the highway and the costs of repairing it add to GDP. The production of cigarettes that cause lung cancer and handguns that are used in murders are also counted as a positive in GDP terms.

These flaws have been understood for decades; in 1968, Bobby Kennedy pointed out that the measure “does not allow for the health of our children, the quality of their education or the joy of their play”, adding that “it measures everything, in short, except that which makes life worthwhile.” A more scholarly book might have investigated other criticisms. Why are GDP calculations so frequently revised and by such large amounts? How do the calculations allow for “black economy” transactions such as drug dealing or prostitution? How do they allow for improvements to the quality of goods, such as the enhanced processing power of computers and mobile phones?

Mr Philipsen has written a polemic, rather than a balanced analysis. In his view, the GDP measure has created a society obsessed with mindless consumerism, in which the focus on growth has obscured the damage done to natural resources. When people use oil or coal for fuel, this is treated as an economic plus but they are depleting our natural resources as well as adding carbon dioxide to the atmosphere.  

His case would be more convincing if he had written a more balanced account. Economic growth and environmental degradation do not always go hand in hand; the British economy is a lot larger than it was in the 1950s but the smogs that blighted London have disappeared. Oil consumption per capita in the developed world peaked in the 1970s, because higher prices discouraged demand. Indeed, similar warnings of the finite nature of Earth’s resources were written in the 1970s but they have yet to be borne out; the author might have considered why. If countries did try to shift to greener economies by, for example, taxing fossil fuels heavily, there would be significant costs for poorer people (who spend a higher proportion of their income on energy); there would also be unemployment in the energy industries affected, and potentially a problem keeping the lights on all the time. Tackling this issue in a way that acknowledged all the hazards would have improved the book.

The author is right to say that calculating GDP is not the same as measuring welfare, nor does it say anything about the distribution of wealth. But he does not acknowledge the improvements in life expectancy and infant mortality that have been achieved in countries that have seen their economies grow; richer countries can afford better healthcare. He also overstates his case when he writes that "the logic of GDP growth grew into the central target of post-war planning"; actually, governments in the 1950s and 1960s focused on keeping unemployment down until the mid-1970s, when tackling inflation became the priority. Even now, when central banks give forward guidance, they usually refer to unemployment levels rather than nominal GDP targets.

At the end, while he briefly considers alternative measures, the author does not plump for a single option, perhaps because all, like GDP, involve subjective judgments and difficult choices. He writes that there is a need for a debate about "the four essential sides of our goalpost" – sustainability, equity, democratic accountability and economic viability. But surely this debate happens all the time; we do prevent development in the name of preserving the environment, and we do argue about whether raising taxes on the rich, or increasing benefits for the poor, is necessary for social cohesion.

In short, an obsessive focus on GDP might be wrong but it's not clear that we have developed such a mania. And completely abandoning the measure would be wrong too.

The Economist, June 10^th, 2015

NOTES

1. the Great Depression - an economic slump in North America, Europe, and other industrialized areas of the world that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world – Великая Депрессия.

2. Simon Kuznets – United States economist (born in Russia) who developed a method for using a country's gross national product to estimate its economic growth (1901-1985). Simon Kuznets was awarded the 1971 Nobel Prize in economics for his empirically founded interpretation of economic growth.

3. Bobby Kennedy - Robert Francis Kennedy (November 20, 1925 – June 6, 1968), Attorney General during his brother John F. Kennedy administration. He later served as a U.S. Senator and was assassinated during his run for the presidency.

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