FROM THE LAYMAN TO THE POLICY MAKER, everyone in our society should have some basic knowledge about gross domestic product (GDP) – a term used to describe the value of all goods and services produced within the local economy in a given period, usually one year in the case of small open economies like those in the Caribbean because of limited financial and human resources.
If GDP is increasing from one period to another the economy is experiencing economic growth. If it is declining from year to year, the economy is recording negative economic growth or contracting. Two or more consecutive periods of contraction is referred to generally as a recession.
As a key macroeconomic indicator, GDP conveys two important sets of information: it gives us an idea whether the country is progressing economically. Increases in GDP represent economic progress, reductions suggest contraction. Hence, GDP reflects the quantitative aspect of economic development. GDP is possibly the best measure of the size of a country’s economy.
As GDP increases, the economy is getting bigger. When GDP declines, the economy is becoming smaller. So if Barbados’ GDP in 2014 was US$1.5 billion in comparison to Trinidad and Tobago’s US$3 billion, it means that Trinidad and Tobago’s economy was twice the size.
The importance of GDP aside, how reliable is this measure of the size and performance of an economy? Can a more efficient indicator of economic activity be derived? The answers to those questions may very well surprise all, but certainly not one, Mark Skousen.
In a Forbes opinion piece published online on November 29, 2013, entitled Beyond GDP: Get Ready For A New Way To Measure The Economy, Skousen said: “Starting in spring 2014, the Bureau of Economic Analysis will release a breakthrough new economic statistic on a quarterly basis. It’s called gross output (GO), a measure of total sales volume at all stages of production. GO is almost twice the size of GDP…This is the first new economic aggregate since [GDP] was introduced over fifty years ago.
“It’s about time…I have made the case that we needed a new statistic beyond GDP that measures spending throughout the entire production process, not just final output. GO is a move in that direction – a personal triumph 25 years in the making. GO attempts to measure total sales from the production of raw materials through intermediate producers to final retail. Based on my research, GO is a better indicator of the business cycle, and most consistent with economic growth theory.”
But the story doesn’t end with those remarks. Skousen continues: “While GDP is a good measure of national economic performance, it has a major flaw: In limiting itself to final output, GDP largely ignores or downplays the “make” economy, that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services.
This narrow focus of GDP has created much mischief in the media, government policy, and boardroom decision-making.
Don’t we all make a similar mistake in our use and interpretation of the annual or quarterly GDP figures released by our central statistical offices and reported to the public by various central banks?
Since the answer to that question is yes, then, it goes without saying that we in Barbados and the rest of the Caribbean ought to invest some resources into the implementation of this new approach to measuring the sizes of our economies so that better quality data can be made available to all for policy-making and economic analysis.
Our struggling economies deserve that much!
