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The most commonly used measure of an economy’s progress by government agencies is the GDP, or gross domestic product. It is a dollar value measure of all of the goods and services that are in an economy during a time period, generally quarters or a year. It’s simple formula is GDP = C + I + G + NX, or GDP equals the sum of consumption, investment, government expenditures and the net of exports. In concept it is that simple, but its usage as a tool to measure an economy and provide objective conclusions turns it into nothing more than an unreliable tool that is severely flawed and in any practical purposes, should simply be disregarded every time it is reported.

What is Economic Growth

For simplicity purposes in this demonstration, say that in year one, all of the variables had $100. GDP is therefore $400. That means the value of all the goods and services in the economy that year was $400. Now in the second year consumption increases by $1, while everything else remained the same. Now GDP is $401. It is growing! This is basically what we hear on the news and from government agencies 4 times a year. They attempt to brag to the public about their amazing progress in growing the economy. Despite this, and against all the facts, and the numbers used in the example, around two thirds of the GDP is consumption (private activity) and the second largest portion is investment ( private activity). Nearly 80% of the GDP is private activity and is unrelated to the government in the first two variable alone, besides the actual limitations placed upon it by the government in the forms of taxes, regulations and other restrictions. Take those away and consumption and investment would actually be much higher, but that is not the overall topic for here. So despite the fact that most of the activity is not by the government, the officials then get out their press secretaries and brag to the public about the amazing job they have done for creating growth… which is indeed inherently dishonest. Creating growth through giving back some of the money already stolen away to increase consumption is like a bank robber taking $50 from everyone’s bank account, putting then mailing all the account holders $10 and saying, “I increased the size of your bank account by $10.” That just doesn’t make sense, but the government, news, and public allows this to become an accepted idea.

In addition to this, let’s just forget about the notion stated above and assume that growth was indeed obtained, however that is no in actuality a necessarily good thing. Like in the example above, in the second year, the economy grew by $1, so one could try to argue that now society is 1 better off. In actuality, they are likely wrong. or starters, GDP is not a measure of well-being. It is a literal measure of value. Non Profit Growth What did it take to earn that $1 of consumption? Did a worker have to work an extra 100 hours in the year in a salaried position to expand upon an advertising campaign to market a new product? Increased work weeks and longer hours for a minute growth level hardly seems justifiable and hardly seems like progress. Did the government raise taxes on the population further stealing their wealth and chose to spend $1 extra on funding some sort of inefficient program as they do every year? That hardly seems like progress too. So what does the growth mean? It means just as what it is literally supposed to mean, and not what people try to spin it as in the media and government agencies. It means consumption, investments, government expenditures or net exports increased by $1.

Another way to look at this fact is simply by looking at the GDP number per person. The GDP per capita is a measure of wealth per person in the measured area. So in year one there was $400 of value in the region, and let’s say there was also 400 people. The GDP per capita would be 400 divided by 400, so $1 per person. In year 2, assuming the population stayed constant, it would be 401 divided by 400, so $1.0025 per person. PROGRESS! You can now argue that perhaps people are better off as their marginal wealth increased. The problem here is, the population in America and on a global scale is not constant, it is growing. So in reality in year 2, the GDP is $401 and the population is now 410 people. So the GDP per capita would be: $0.98. So we had economic growth, but on a purely per capita scale, people are worse off. That hardly seems like progress at all. It would seem as if growth is not a good thing in that situation.

For counter example’s sake, let’s say that growth in year 3 was by $1,000,000,000,000,000,000,000,000,000 and the population only increased by 3. That would sound phenomenal, and in most circumstances one would be justified in making such a statement, but sadly even GDP per capita, which is a far more accurate measure than GDP alone, is not really a measure of anything significant in an economy. It is an average, and as basic stats and math teaches you, that can include extremes on both ends to lead to a number in the middle. Let’s say that the entire growth in year 3 was caused by the discovery of oil by one land owner and due to his new found wealth he goes and buys himself everything he could ever dream of. So now the economy grew by $1,000,000,000,000,000,000,000,000,000, but it all came from one person. Are people directly better off as a result of only one person or one small group of people holding all the wealth themselves. In reality and in extreme circumstances, you could have a warlord come in and steal everyone’s assets and then spend that on top of the money of his own and the economy could increase, and the GDP per capita could increase, but yet the underlying fact is, every single person in the country but one is now poor and broke.

Some of the examples are extreme, some of them aren’t, but the point stands that GDP and GDP per capita are not reliable measures of how people are doing and growth is not a measure of how people are doing. People could be worse off, but we see growth. Their overall happiness could have decreased, the number of hours they worked could have increased, immune systems could have weakened, the air could have gotten harder to breathe, more regulations could have been implemented on their lives… and regardless of any growth, their overall utility is now lower. In sort, growth and GDP should never be used to measure a nation’s or society’s well-being.

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