The Poverty of GDP

The Economist recently ran a piece criticizing the suitability of GDP as a measure of economic development and material progress. In the past, the publication has touched on various other weaknesses of this aggregate measure – including the fact that it is not a timely and reliable indicator that can guide economic policy – as well as suggesting new measures for prosperity.
As expected, none of these articles discuss one main drawback of the GDP aggregate – the inclusion of government spending. In America’s Great Depression, Rothbard removed the G component to suggest the Gross Private Product (or the netted version, the Private Product Remaining) as a better gauge of the material progress of a nation. Professor Herberner has also pointed out various important economic aspects that GDP, as a rough aggregate measure, leaves out. Moreover, professor Salerno has also shown that a reduction in the GDP – as it is calculated today – via a reduction in government budgets and taxation would in fact be underlined by an increase in the capital stock, a rise in the economic welfare of producers, and a higher real standard of living for the entire population.

This post was published at Ludwig von Mises Institute on May 14, 2016.