Continuing Conversation... Diane Coyle on GDP

EconTalk Extra
by Amy Willis
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Diane Coyle on GDP... Coyle Postmortem...

In this week's episode, Roberts talks with Diane Coyle about her new book on GDP. We'd like to hear your thoughts on this episode, too!

Questions below the fold:

Check Your Knowledge:

1. Describe the origins of GDP. What was the role of the state in this, and how does this affect your perspective on the veracity of this measure? How has its use changed over time?

2. List some of the challenges faced in calculating GDP. Which of these challenges do you think is the most significant, and why?

3. What is the "Easterlin paradox," and what does this suggest about the relationship between happiness and economic growth?


Going Deeper:

4. In discussing the differences in GDP between rich and poor countries, Coyle suggests that there are incentives for poorer countries to "remain poor." What does she mean by this? How might such incentives be mitigated?

5. To what extent does relying on GDP as a measure of economic growth perpetuate "gross materialism?"

6. Coyle remains optimistic about micro level measures of economic growth, but there is a great deal more measuring she thinks can and should be done. What does she think the government should be measuring, and how much more illuminating do you think such measurements might be? What would you add (or subtract)?

7. Listen to this episode of EconTalk with Stevenson and Wolfers on happiness. What is their view of the Easterlin paradox? Do you agree with their approach?


Extra Credit:

7. In a 2010 Econlib Feature Article, David Henderson rails against what he calls "GDP festishism," or the use of GDP as a measure of well-being. He uses several examples to illustrate why GDP is a poor target for government policy. Coyle tells Roberts that governments should stop claiming that they can increase GDP. Yet she seems more sanguine about the possibilities for policy-makers than Henderson. How do you think Henderson and Coyle disagree, and what do you think Coyle would say about the examples Henderson uses in his piece?

8. Some have suggested that GDP growth only benefits a small portion of the population. In this view, GDP is flawed because it masks diverse impacts of growth on different parts of the population. Find an EconTalk guest who agrees with this perspective and one that does not. What is their disagreement about?

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COMMENTS (7 to date)
Don rudolph writes:

When it comes to war materials if I have a crossbow and my enemy has a club I have the same relative value as if I have nukes and my enemy only has tanks.

How would you measure the value of a walk through the canals in Venice vrs. the strip malls of Phoenix in terms of GDP? Hotel prices?

Don

John Foster writes:

Does anyone have any thoughts on the margin of error involved in GDP calculations? Is a 2.7% growth really statistically different than a 3.1% growth? Is 0.5% any different than -0.2%?

Is it even possible to guess at a margin of error since there is no benchmark to which the official number can be compared? Is the official number thus always right since it is the only number?

Seems to me that GDP not only has the problems discussed on this podcast, but also can we wildly wrong and nobody can tell...

Amy Willis writes:

@Don, well-founded concerns...re: the two different walks, neither would count, as both are "leisure," but even within that category, those are two very different things! (And I'm a former Phoenician!)

You might enjoy David Henderson's piece from a few years ago on GDP Fetishism.

Jolyon Parslow writes:

Some genuine puzzling questions from a non-economist arising from Coyle's comments:
1. In discussing steady states, she says around minute 33 that if GDP growth is nil, you'll have to give up something when you buy a new iPhone. Why? And why does this matter? Won't the resulting emergent economy that Russ often talks about solve this through prices for new and second hand phones and everything else? In Japan where growth has been nil or negative for 2 decades, do people not buy new iPhones? What does she mean?
2. Why does a steady, no-growth state mean no innovation? I have heard this assertion by economists many times so presumably it has some rationale. What is it, can we put it to the test? Would Apple if headquartered in Japan not bring out an improved model MacBook if GDP growth was zero or negative? Would doctors in Japan cease medical innovations for the ageing population? Why would that be in their interest?
3. Another possible hole in GDP statistics: What is the role of the cost of information in GDP as a useful indicator? I presume none unless it is charged as a service e.g. an accountant or doctor. Better economies = more stuff & services = everyone better off. However, lots of economic models also assume free markets i.e. everyone has access to information at low cost, but even with cheap internet & free Wikipedia, there is a high time cost to research. Information costs are a key part of the working of economies. When they are very high we don't have free markets (e.g. doctors) and can get rent seekers and protected markets and monopolies. So there seems a paradox: having costly information counted in GDP means less free markets, less efficiency and thus an illusion of a healthy economy, yet free information (not counted in GDP) leads to more efficient productive markets (I presume). Is this another argument for the dashboard idea?

Buck writes:

I have a question/comment regarding some of the immaterial/non-quantifiable aspects of our lives that were discussed in the podcast.

Wouldn't products and aspects of everyday life that aren't directly contributing to GDP (like Wikipedia and leisure time) still have an indirect benefit in the sense that it increases our productivity and thus helps the labor force produce more units per time spent thus contributing to an increase in GDP as a direct result of these non-quantifiable "products".

So in the case of Wikipedia, now when I have to do research for a new project at work rather than having to go to a local library or contact a government agency, in most cases I can do a quick Google search (which in itself does not contribute directly to GDP if I don't click an add but does by increasing my productivity) which brings me to Wikipedia and gets me the information in a couple of minutes instead of a couple of hours that it might otherwise have taken. This has a direct result on my output as it now frees up an additional couple of hours that I can spend on output for my company.

A parallel can similarly be drawn to leisure time, which I would argue can increase our productivity per hour of work by making us happier and mentally maybe more capable of doing our job. If you work an 80 hour week, the marginal return on your labor will probably start to decline after around hour 40-50. If you then have to keep this up over long periods of time, then that decline might start even earlier. Leisure time could also add to an increase to GDP through things like plane tickets, museum tickets, travel costs, etc.

To Jolyon's comments above, I'll just give my quick two cents, mainly about the points about Japan. Japan isn't quite a good example for making the case of steady states because of their negative population growth. If you have no growth in GDP but a decline in population (and an ageing population) then the same amount of GDP can be split among less people, making the individuals better off than they otherwise would be. They touch on this briefly on the podcast when they talk about trying to convince people to stop procreating (or procreate less).

[broken url removed. Please check your links before posting.--Econlib Ed.]

Arde writes:

4. Coyle suggests that sometimes poor countries have incentives to remain poor in statistical sense (not in real sense) to get access to World Bank concessional loans.

3 suggestions on how such incentives could be mitigated:

1) Common methodology for calculating GDP. Additionally, quality of statistics should be subject to external review. For example, countries could apply for certification to some international statistics quality assurance body that could verify that their way of calculating GDP is in line with good practices. This could be a pre-condition for applying for loans.

2) Relying on some other measure that measures quality of life. For example, there could be a survey in all countries to assess the quality of life on the ground (common methodology; carried out by independent specialists). People could be asked on their income, whether they have a job, their health status, their nutrition, whether kids go to school, if yes, kids could get a little age appropriate test (to check quality of schooling), whether they suffered from violence etc.

3) Not relying on any one particular indicator. There could be a market for foreign aid bringing together donors and potential recipients. Each country/NGO/ whatever could present their ideas, where would they invest the donor’s money and the donors would go around shopping and looking for the project that offers the best use for their money. The governments/NGOs will have incentives to show what results will be achieved and how they will ensure good governance. Some donors would be interested in helping particular country, some would care more for special groups of people (i.e., women, children) or problems (environment, health), some would like to negotiate additional conditionality etc. Some would care more that the project is sustainable and will promote growth, some will care more for reliving suffering of people. Some will care more for evaluation and monitoring, some will care more for past experience and reputation etc. When assessing the projects, some will care for GDP per capita of the country, but many will not. Supply and demand (preferences and needs) will decide which projects get the financing.

Of course, all of these suggestions have their drawbacks. For example, suggestion 3 can in practice turn into situation that the country sending representatives with the best English and nicest powerpoint presentation will get the money.

Amy Willis writes:

@Buck, really good questions. And you're likely correct that these sorts of productivity-enhancing pursuits contribute indirectly to GDP. But they can't be measured (or aren't at any rate. Also, if we could measure them, how do we know that the productivity-enhancing effect is equivalent for all people. For you, no doubt...but what about your colleague who spends his or her time with cat videos instead of researching online. So it's a tricky one...

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