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GDP AS A PROBLEM
The production of goods and their provision of their citizens, one of the main goals of the state. The well-being of the country's residents is directly dependent on the state of the economy and the effective activity of all participants in economic relations. To determine the economic state of the state and the consistency of the economic policy of its government, economic indicators are used, the main of which, in the current historical period, is the Gross Domestic Product (GDP).
At present, the economic policy of most countries of the world is largely determined by the goal of increasing GDP. This concept was introduced into economic terminology in the 30s of the XX century, when, based on estimates of the national income and product of the United States, a detailed understanding of the economic activity of this country was first obtained. The author of works on measuring the volume of national production and calculation methods was our compatriot, Nobel laureate Semyon Abramovich Kuznets, who is considered the creator of the concept of GDP. Until that moment, there was no universal indicator in the world that would reflect the change in the economic state of the state.
The history of GDP originates in the United States, so here is the definition of GDP from the textbook "Economics: Principles, Problems and Policies", which was published for the first time in 1960 in the United States, where Gross Domestic Product is the total market the cost of all finished goods and services produced in the country during the year. GDP can be calculated as the sum of the gross value added of all industries (or institutional sectors) plus net taxes on products (taxes on products minus subsidies on products).
From the very beginning of using GDP as a kind of universal determinant of the state of the economy, many respected economists have warned that GDP is a "specialized instrument", and its use as an indicator of general welfare can lead to dangerous misconceptions. So Simon Kuznets himself, one of the architects of the US national accounting system, warned against equating GDP growth with an increase in economic or social welfare.
The commonly used definition of GDP, which is accepted by all, is the following:
Gross domestic product is a macroeconomic indicator that reflects the total market value of all final goods and services that have been produced in all industries economy on the territory of a certain state in one year.
At first glance, everything is clear enough and there is no doubt about the correctness of this approach to determining the state of the economy. If production is growing, then demand is growing, if demand is growing, then welfare is growing. At the philistine level, the logic is as follows, if this year I purchased goods and services for a LARGE AMOUNT than last year, then I began to live better. Is it really.
REFERENCE
Well-being is a term that means prosperity, security, a calm and sufficient life, that is, a life in abundance. The well-being of a person, in contrast to his personal happiness, depends on external conditions, which are rarely favorable for everyone. A person cannot be called safe if he has a precarious financial situation, everyday issues are not resolved, there are not enough resources to carry out what was planned, there is no sense of security, satisfaction from life. Hence, the minimum list of components of well-being is determined: positive emotions, meaningfulness of actions, participation in ongoing processes, relationships with others, personal achievements. Positive emotions are well known - they are joy, recognition, pleasure, admiration, optimism, trust, pleasure, etc. Meaningfulness is finding meaning in what you are doing and understanding why you are doing it. Effective involvement in the process is an activity that brings the expected result, satisfaction from the time spent and other personal resources, it can be a favorite business, social or other activity, as a result of which a person receives satisfaction of various types: material, moral, emotional, etc. ... Personal relationships with others are characterized by the absence of an obligatory positive moment, since communication with people is diverse and varied, but this is precisely the interest in life in society, which is directed and strives for constant good communication with close and random people. Personal achievements give semantic completeness, summarize what has been done and lived, make objective assessments about whether our life is safe or not.
Well-being is a term that defines the state of a person (family, social group, population) in terms of the provision of his benefits at the appropriate level. In the current use of the terms Well-being and Well-being, the first, for the most part, refers to the individual, the second is more often used in social and political considerations. Hence, concern for welfare is, first of all, the care of the state for the population of the country, for its provision with material, financial, social and spiritual benefits, care for the present and future of the state and its citizens. The main element of well-being is the level of income of the population and their differentiation. The level of income directly depends on the efficiency of the economy in the country. In addition to material support income, well-being includes working and living conditions, the amount of free time, indicators of the level of personal safety and freedom, the demographic and environmental situation in the country, the availability of educational and cultural resources, conditions for self-development and self-realization, the ability to influence ongoing processes, one's future and your country.
AN EXAMPLE of the use of the term Welfare, in a quote from the President of the Russian Federation Dmitry Medvedev in the Address of the President of the Russian Federation to the Federal Assembly of the Russian Federation in 2009 - "The prestige of the Fatherland and national welfare cannot be infinitely determined by the achievements of the past, because oil and gas production complexes , providing the lion's share of budget revenues, nuclear weapons that guarantee our security, industrial and communal infrastructure - all of this was created for the most part, still by Soviet specialists, in other words, it was not created by us. "
The need for the existence of economic indicators is obvious, since it is by their dynamics that economists and the government of the state can track the socio-economic development of the country, make the necessary adjustments to economic policy, plan future transformations and state building, take measures for economic protection, stimulation, development branches of the economy and the country as a whole. The country's economic indicators clearly demonstrate how effectively it is developing, how its income has grown or decreased over a certain period of time. GDP, as the main used economic indicator, provides information for comparing and analyzing the economic condition of each country that uses it, gives an idea of its economic growth, or vice versa, indicates a deterioration in the situation.
The definition and use of GDP as an indicator makes it possible to objectively assess the entire volume of production aimed at investment or current consumption, both on a national scale and in the context of each sector of the economy. The calculation of GDP gives an understanding:
- about the degree of activity of economic entities of the economy
- what is the national income of the state as a whole
- how successful is the economic activity
- how effective is the economy by industry
- which of the branches of the economy and to what extent is the source of income for the state treasury
- what is the potential volume of goods and services that can be produced in the near future
- what are the trends and forecasts of macroeconomic processes
Thus, the calculation of the value of the Gross Domestic Product makes it possible to assess the socio-economic state of a particular state and at what stage of economic development it is at the moment. This macroeconomic indicator has no national or geographic origin, and is applicable to any country. Also, the existence of GDP gives an idea of the economic situation of all mankind, so to determine the world GDP, the GDP indicators of all countries are added, where a comparison of the results by year will reflect the situation in the world economy.
The above definition of GDP is not exhaustive for understanding how it is calculated and how it is used in the economy, as well as GDP in the specified definition, it is not used as a sufficient economic universal indicator. There are types and classifications of GDP, which are used in practice.
# Nominal GDP is GDP calculated in current prices and does not take into account the rate of inflation, as a result of which the calculated value can be significant at the moment when there is a decrease in the volume of production in the country. Thus, the nominal value shows only an increase or decrease in the value of the goods produced, and in no way the dynamics of production.
# Real GDP is an indicator that is used to take into account the growth of production and is expressed in prices of the year that was taken as the main one in the calculations. The advantage of the indicator is that it allows you to determine the increase in the country's trade turnover, if any. Real GDP does not depend on changes in exchange rates and other economic parameters. It is this indicator that allows us to draw conclusions about the current state of the economy in the country. Real GDP allows you to quickly understand if there is a crisis in the country and how difficult the economic situation has already developed.
The ratio of Nominal GDP to Real GDP is called the Deflator. The GDP deflator is a price index that shows the change in the price level of all goods and services produced in the current year, in comparison with the price level of the previous year. When calculating the deflator, only the products that are produced in the country are taken into account, therefore, the result is internal inflation or deflation. For countries with stable economies, Real and Nominal GDP are the same.
# Actual GDP is GDP, which is calculated taking into account underemployment and realized economic opportunities.
# Net GDP - defines GDP minus depreciation expenses.
# Potential GDP is GDP at full employment, it reflects the potential of the economy. The latter can be much higher than the real ones. The difference between actual and potential GDP is called the GDP gap.
# GDP per capita is a macroeconomic indicator that reflects the state of all sectors of the economy in relation to each citizen of the state. In other words, GDP per capita is the result of dividing GDP by the number of inhabitants of the country. Using this indicator, the solvency of the country's population is assessed.
# GDP by Purchasing Power Parity (PPP) is a characteristic that determines the level of economic development of a country by comparing the ability of a citizen of one state to purchase the same product in his own and a foreign country for his income. When the PPP in relation to another country is positive, this indicates a better standard of living, when negative, on the contrary. According to the PPP theory, the same amount of money, converted at the current exchange rate into national currencies, can buy the same amount of goods and services in different countries of the world. The determinant of PPP can be the Big Mac index or other analogs.
Along with GDP, GNP exists and is used, an equally significant economic indicator. GNP (gross national product) is the aggregate market value of all final goods and services produced per year by residents of the country, regardless of their geographic location, that is, both within the country and abroad. This indicator does not take into account the product produced by foreign citizens and enterprises operating in the country. The gross national product determines the value of the national economy, without taking into account the location of the enterprise or citizens, while the GDP determines the value of goods and services produced within the state, i.e. on its territory, regardless of who are their producers.
CALCULATION OF GDP
The calculation of GDP takes into account:
- final goods and services that were produced in the accounting year
- the market value of the final goods and services that are produced for the purpose of sale
- all products, the production of which was carried out on the territory of the country, regardless of which country is the owner of production factors
The following are excluded from the GDP calculation:
- goods produced by residents outside the country
- state transfer payments, including payments of social insurance, unemployment benefits, scholarships, pensions, other social payments, such payments are defined as gratuitous, and not payment for goods or services
- private transfer payments, including material assistance, one-time gifts, which represent the transfer of funds from one private person to another
- transactions with securities, including all transactions of purchase and sale of shares, bonds, etc.
- sale of used items (used cars, secondary real estate market, etc.), since they were already included in the calculation of GDP in previous periods
There are several ways to calculate GDP:
- by expenses
- by income
- at added value
Calculating GDP by EXPENDITURE
To determine the GDP by expenditure, it is necessary to add up the expenditures of individuals, organizations conducting non-commercial activities, investments of individuals and legal entities in the economy, government purchases of material assets, government funding of budgetary organizations, the difference in the cost of goods that were imported and taken out of the country.
The formula for calculating GDP by spending:
Consumer expenditures, that is, all the current expenditures of the country's population for the purchase of goods and services: food, clothing, durable goods and so on, with the exception of the purchase of residential real estate
+ (plus)
Expenses of public and non-profit organizations
+ (plus)
Gross private domestic investment, increasing fixed capital, including the costs of enterprises on production investments, investments in residential real estate, costs of increasing inventories
+ (plus)
Government funding, government spending on the purchase of goods and services necessary for the production of public goods (education, health care, national defense, culture, etc.)
+ (plus)
Net exports, that is, the difference between the country's income from exports and the cost of imports (can be positive or negative)
= (equal)
GDP by expenditures, determines the amount of expenditures (costs) for the final products of all market entities (sectors of the economy) that operate in the country.
Calculation of GDP by INCOME
GDP by income is the sum of the primary factor of income received from the creation of the country's GDP by the owners of resources (factors of production).
The formula for calculating GDP by income
Remuneration of workers (salaries, bonuses and other payments)
+ (plus)
Gross profit of all enterprises (the difference between revenue and cost of goods (services))
+ (plus)
Interest payments, income from property lease, rent, similar payments
+ (plus)
Taxes on imports and production
+ (plus)
Depreciation
+ (plus)
Income from capital investment
- (minus)
Subsidies
- (minus)
Income received from abroad
= (equal)
GDP by income, determines the amount of money earned in the country for the reporting period.
Calculating GDP at VALUE ADDED
In this method, the calculation uses the indicators of the added value of products minus tax payments and contributions. The value added indicator is calculated as the difference between receipts and expenditures. Then the obtained values are summed up.
The formula for calculating GDP at added value.
Income received from the sale of manufactured products
- (minus)
Costs spent on the purchase of materials and services for production
- (minus)
Taxes
+ (plus)
Subsidies
= (equal)
GDP at added value, which takes into account only final goods and services in order to exclude duplication in calculations and overstatement of GDP. Intermediate goods, which are raw materials for the production of final products, are not taken into account in the calculation.
Obviously, the three formulas for calculating GDP are not able to give a sufficient, let alone a complete picture of the economic activity of subjects of economic activity, including because of the number and uniqueness of a significant part of cases of economic relations. Therefore, in addition to GDP, other methods and determinants exist and are applied that allow reflecting the economic state of the state, the well-being of its citizens, as well as individual sectors of the economy and components of economic activity.
GDP as a PROBLEM
A problem is a gap between a prescription (what should be or is required) and a description (what actually happens), that is, a situation in which the desired differs from the actual.
The existence of economic indicators provides information about the state of the economy, for subsequent analysis, on the basis of which the right decisions should be made and the right goals set. The macroeconomic indicator of GDP is the result of using the appropriate calculation formulas, the reliability of which and the methodology itself should be maximum. The consequences of an erroneous or inadequate assessment of the state of the economy and its sectors can cause incorrect goal-setting, cause significant damage to the financial and industrial well-being of the economy of any country.
Economic policy of most countries of the world is largely determined by the goal of increasing GDP. Economists, politicians and the media regularly talk about GDP growth as if it (growth) represented progress and the growth in the well-being of society. Of course it is not. What are the sources and causes of systemic errors in the definition of GDP.
# Filling in the parameters in the calculation formulas for determining GDP is associated with the problem of the reliability of the information collected and their completeness. For example, the calculation takes into account only those productions of goods and services that were officially registered and carried out through the accounting department, and it is these indicators that will be included in GDP. Due to the fact that a significant part of production is in the shadow of the tax authorities and statistics, respectively, the real value of GDP cannot be reliable. The shadow economy sector in most countries is estimated at 20-30% of official GDP. Income from the shadow economy is fundamentally not taken into account. Each state, in one way or another, seeks to reduce the "invisible" part of GDP. With the advent of digitalization, this task becomes more solvable.
# GDP takes into account only produced goods or services for sale at market prices, hence, there is no accounting for goods and services that are received by consumers free of charge or at non-market prices (voluntary work, charity, material and other assistance, etc.), which worsens the statistics of the well-being of residents of the state.
# The problem of the accuracy of estimates and revision of the volume of GDP. There is a baseline estimate, a preliminary estimate and a final estimate of GDP. In the middle of each year, the final GDP estimate is adjusted for the three preceding years. After that, every five years, a complete revision of all GDP data is done, the so-called revision associated with a change in the base year. Hence, it is clear that the data on GDP at the time of publication are by no means final estimates; no estimate of GDP is immune to future changes. The reason for this is that many components of GDP are not measured directly, but are estimated based on preliminary considerations or even assumptions. Given that GDP, in principle, should measure the value of all goods and services produced in the economy, it is not surprising that not all data are available several weeks after the end of the corresponding period. The data are revised as new information becomes available. Review revisions can be substantial. The value of the quarterly GDP growth rate may change by 2-3 percentage points from the first to the third GDP estimates. Changing the base year for calculating real GDP also makes significant adjustments to the total.
# GDP depends on changes in the price and income index of the economy in question. Nominal GDP grows with inflation due to higher prices for products and services. Conversely, it falls during deflation due to falling prices. Thus, an inflation rate of 5%, with a constant level of production of goods and services, leads to an increase in GDP by 5%.
# GDP is usually calculated in US dollars, hence the problem of compiling comparative tables of GDP of different countries, when there is a translation of data on the GDP of a country from its national currency into US dollars. Conversion into dollars is made not at the exchange rate, which is completely unacceptable for an objective assessment, but at Purchasing Power Parity, which to a lesser extent, but also gives results with a significant error. In addition, such a comparison cannot be correct for many reasons: incorrect definition of the PPP, living conditions, different social security, internal and external privileges for citizens, etc.
# Since GDP takes into account only monetary transactions associated with the production of goods and services, this indicator is based on a fundamentally incomplete picture of the social and natural systems within which people and the economy exist. An example would be the ubiquitous existence of the exchange of goods and services, which can occur without proper accounting. Also, goods and services that are created and sold within social groups, in local or level economic relations, which are carried out without proper registration for statistics and tax accounting, are not taken into account.
# GDP does not take into account the nature of manufactured products and long-term prospects, so the growth in sales of natural resources and the growth in sales of high-tech products have the same impact on the indicator. At the same time, filling the GDP through the sale of the country's irreplaceable natural resources encourages their depletion. Thus, the methodology for calculating GDP counts the decrease in natural capital as income (!), thus undermining the basis of similar income in the future. In addition to the economic component, the development and extraction of natural resources for sale leads to the degradation of ecosystems, the death of flora and fauna, and the gradual defeat of life on the planet.
# GDP does not take into account the improvement in the quality of goods and, accordingly, the well-being of the population, due to the emergence of the availability of goods that were not available to the majority in the past period, in the current period they are becoming massive due to a sharp decrease in their cost (production cost).
# Some types of activity or specific production, ultimately represent harmful or criminal activity, as well as a threat to national security, that is, an actual increase in GDP, is accompanied by subversive activities in the present or future for the state and its inhabitants. For example, the production and sale of food products that lead to health problems for people who consume them.
# Interest in overestimating the GDP indicator at the state level, to use the increase in GDP as a political and social argument, and the increase in GDP reflects the economic state of the state, which means it affects the indicators of stock indices, exchange rates on the stock exchanges, monetary policy of the state, etc.
# In addition to the above reasons, which make it possible to reasonably criticize GDP as an indicator of the state and development of the economy, as a reliable calculation determinant: imperfection of the taxation system and tax policy, filling GDP through the sale of irreplaceable resources of the country, as well as errors, inaccuracies, additions, write-offs, losses, errors, rounding, concealment, etc.
CONCLUSION
GDP is a necessary universal generally accepted indicator for determining the state of the economy, however, the reasons outlined above allow one to reasonably criticize GDP as a reliable calculated determinant and as an indicator of the state and development of the economy. Also, an increase in GDP cannot and is not perceived by the population as an improvement in their well-being, which is justified.
Despite almost a century of history of measuring the state of the economy, there is still no single universal formula in the world that would objectively and reliably report on the economic state of the state and its citizens. Taking into account the pace of technical and technological progress, it is possible that in the near future the need for such a formula will be leveled.
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2020.06
2021.05
Article in ORIGINAL language HERE
