What a minefield of off putting acronymic jargon! I wanted knowledge and not just inert information in the form that would better describe why economies are focused so forcefully towards the GDP (Gross Domestic Product) as an index. First we need to understand the ideas around GDP and in particular how it’s influenced in the real economy.
Here’s an every day example presented in such a way that a person in the street could potentially grasp this otherwise complicated concept. To make the idea more accessible let’s use something hopefully more recognisable, in this case our own household:
- Growth (or GDP) in our household context describes the monetary value of all our dealings relating to our outputs in a given period, say a year.
- There are two basic ways that we can calculate our household value (I.e. domestic growth) either by summing our joint household incomes or summing our total expenditure. Both of these considerations will provide a spot check on where we are in monetary terms.
- The difference over the last period, positive or negative gives us our growth. So, if our household salary increases and/or separately we produce more then we are firmly in the growth realm.
This is our household (I.e. domestic) scorecard and we can use this value to compare ourselves with the Jone’s next door or the Kardashian’s depending on which side of the pond you live. We can also compare our yearly household average growth / domestic product with another given geolocation, such as a country.
A few important things to note here:
- What we include in the basket of income or expenditure has an impact on the bottom line growth numbers. For example, If we decided not to place a value on domestic housework, fixing the car in our home garage or say breastfeeding our bouncing baby then these would skew the numbers. It follows then that what we include in the basket of either income orexpenditure as items either blunts or sharpens the accuracy of the growth calculation.
- What we earn and what we buy varies at any given life point in line with our particular life needs and wants. Generally, the younger / older we are the less we earn, the more dependent we are the more we consume. You get the idea that needs and wants at a particular life point impact the growth profile.
- Typically, if we spend more than we earn then we become indebted which in broader economic parlance is expressed as the National Debt. The moral hope here is that we don’t pass on our debt to our offspring and others do not pass on their debts to our household. In economic terms this is certainly not expressed in practice as financial institutions have passed on their debt to us the household. Private risk did become public debt as recently as the 2008 economic crash.
- The growth / domestic product numbers each year need to be adjusted for inflation so as to provide a reasonable parity comparison. In our scenario we could adjust our term by placing the word Real in front of growth / domestic product to indicate this inflationary levelling up process.
- Inflation is also calculated based on the changing prices in a defined basket of goods or services. Depending on what we leave in or take out we could misrepresent the final real growth / real domestic product value. Here we could skew the numbers more favourably by understating the inflation figures to present real growth / real domestic product in a more positive light.
- The higher up the scorecard the greater earning potential the household may have and the greater could be their potential expenditure.
- As a household we can increase our income by doing things smarter thereby increasing our own productivity over a given time period or energy outlay.
- We can also buy less and thereby reduce our expenditure. If we were to seek to reduce our consumption, hopefully thereby also reducing our expenditure, then this single act would preserve the planets finite natural resources for future generations.
- Devaluing a country’s currency affects the growth / domestic product calculation. If fiat money say sterling is devalued by printing more (more recently expressed as quantitive easing) the the figures may look the same year on year but actual wealth would have in fact gone down in real terms.
The big point is that (as I was reminded recently by a very knowledgeable colleague) as inflation increases then growth / domestic product also needs to increase in proportion just to stand still. This gives us our primary reason for staying completely on the growth / domestic product upward ladder. When we place the word Real in front of the terms then we are expecting some form of growth just to stand still. It also follows that if we had negative inflation (I.e. prices of what we bought went down) then real growth / domestic product would interestingly increase.
It follows that inflation is the prime mover for the governments economic pursuit of Real GDP. If we had zero or negative inflation growth / domestic product values then inflation would be less forcefully pursued economically by our respective governments.
As you can see above there are many ways that government fiscal policy or wider economics can corrupt the growth / domestic product numbers.
The present government fiscal approach here in the UK is to stimulate growth by spreading the solution across supply and demand side policies. This balanced approach sees supply side business / corporation taxes reducing and demand side income taxes / national insurance also reducing. It’s neither Keynesian or strictly neoliberalism economics in that it’s pragmatic rather than idealistic. It is however gambling with the future in that inflation is already at around 10% so just to stand still the GDP needs to kick this adverse affect into touch before realising any real gains.
It’s also interesting to note that the Bank of England in increasing the base interest rate will (although aiming to reduce inflation which is good) act to deaden growth / national product.
As Mahatma Gandhi very eloquently expressed, The world has enough for everyone’s need, but not enough for everyone’s greed. Within our household needs profile we should aim to manage our wants which in turn will collectively reduce not only inflation but by extension Real GDP and the over consumption of our earths natural resources. The future belongs to our children and it’s up to us to understand the jargon placed seemingly as barriers in our path. Our children deserve a more certain and less fragile future.