How Accurate Is GDP?

In today’s modern economy, statistics are supreme. GDP, unemployment and interest rates all play dominant roles in the allocation of the government’s budget. No spending bill can hope to pass into law without a battery of statistics and figures charting how such legislation will benefit the country. But just how accurately do those numbers reflect the world we live in?

Take GDP, for instance. The famous figure has only been reliably collected in the U.S. since the 1930s and didn’t become the primary indicator of the nation’s economic health until 1991. Yet despite such a short history, economists and legislators treat GDPs of any stripe with devotion. For instance, global financial markets recently went into uproar when China reported its GDP at 7.7 percent rather than the expected 8 percent. That missing 0.3 percent may seem negligible, but it was enough to ruffle the feathers of analysts across the world who now had to readjust their projections. But if the accuracy of the U.S.’s GDP is merely suspect, China’s is outright unreliable. Only gathered for less than 20 years, the Chinese GDP fails to account for many key factors, such as the political pressure of its five-year plans or the enormous private loan industry.

Other figures present similar problems. In trade stat terms, every time an iPhone leaves a Chinese factory and lands on American shores, $200 is added to our trade deficit with China. In reality, though, the components of that same iPhone have been produced all over the world, not just China. A more accurate figure would take all those other manufacturers into account and ascribe value accordingly. Instead, current guidelines grant sole credit to the country where the product is “assembled.” Ultimately, statistical hiccups like this demonstrate just how much the world has changed since these figures became prominent. Decades ago, it was safe to assume that a product was fully assembled in one place. That is simply not the case today as complex supply chains send items crisscrossing around the world. So while statistics like these no doubt provide relevant information, the conclusions they reach are perhaps not so concrete as to justify basing entire economies around their slight shifts in value.

 

Questions:

  1. Do markets put too much importance on statistics like GDP?
  1. Are there other government statistics that raise skepticism?

 

Source: Zachary Karabell, “It’s an Old Numbers Game. What if They’re Wrong?” The Washington Post, April 19, 2013. Photo courtesy of Anthony Theobald.

 

 

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