The Problem with GDP-B

The Gross Domestic Product (GDP) is probably the most used financial metric across the entire world. This metric is derived by assigning a monetary value to each and every transaction takes place within an economy. This allows governments and other institutions to measure whether the economic activity in the entire region is increasing or whether it is on the decline.

However, apart from being the most used economic statistic, GDP is also the most criticized one. Many experts believe that the statistic is misleading for many different reasons. The faculty at MIT also believe that the GDP does not accurately capture the economic situation. This is the reason why they are working on GDP-B which is supposed to be an alternative metric.

In this article, we will have a closer look at GDP-B. We will also try to figure out the shortcomings of this metric as well.

What is GDP-B?

The faculty at MIT are of the opinion that the GDP does not reflect the quality of life innovations that have taken place in the economy over the past several years. This is because the GDP only takes into account products and services that have a price. As a result, most of the services which are produced by the tech industry are omitted from the GDP calculation. The B is GDP-B stands for benefits. This means that the new measure will focus more on the benefits that customers derive from services instead of the price that they pay for it.

According to the folks at MIT, the digital industry is at the center of the next financial revolution. Companies like Facebook, Google, and Twitter, are the behemoths of tomorrow. The GDP completely misses their growth story. For instance, all the articles that are contributed to Wikipedia are free! Hence, if the number of articles present on Wikipedia doubles in a given year, their monetary value would still amount to zero. However, that does not mean that people are not obtaining economic benefits from reading these articles.

The same issue is also prevalent in the music industry. Ever since music has gone digital, the size of the music industry relative to the GDP has been continually shrinking. This creates an image that the music industry is on the decline since people are listening to less music. However, that is simply not true! The reality is that people are listening to more and better music. However, a lot of the people are simply downloading the music from the internet free of cost. Hence, it is not being accounted for in the GDP.

The argument made by MIT is focussed on the fact that the role of technology in our lives has grown by leaps and bounds since the 1980s. The 1980s was a time when computers were a novelty product! Hence, we surely have come a long way. However, numbers don’t seem to depict that. Technology accounted for 4% of the total GDP in the 1980s, and it still accounts for about the same 4%. This is clearly wrong, and hence a new measure is required which takes into account the benefits provided by technology even though they do not have a price tag attached.

The concept of GDP-B can also be extended to other products and services which are not accounted for in the GDP. For instance, the value of services provided by the non-profit sector as well as the ones provided by housewives is not accounted for in the GDP. The GDP-B framework is likely to provide a mechanism to account for these services and add them to the overall GDP.

The Problems with GDP-B

Many economists who are critical of GDP-B believe that the new measure misses out on many issues. It is seen by many as an attempt to appease the government instead of providing real information. For instance, one of the uses of the GDP is to measure the size of the private economy relative to the public sector. For instance, let’s say that the private sector only accounts for about 50% of the GDP of France. However, France has a debt which is 60% the size of its GDP. Now, it is important to realize that the private sector is the one which earns money to pay taxes which can be used by the public sector. Hence, in this scenario, the debt should be stated as being 120% of the private sector GDP. This would provide a better picture to investors. However, these measures are not being implemented since they portray the government in a bad light.

Moreover, it would not be completely accurate to say that the value of services provided by the technological sector is completely ignored. Companies like Google and Facebook only exist because someone pays for their services. These companies sell data and advertisements to other corporations. The selling of data is a monetary transaction which is measured and even accounted for in the GDP. Also, if more users start using these services, more data is generated and sold to corporations. Hence, in a way, the economic value from technological developments is already being captured by the GDP as well.

The GDP-B could very well be an organized PR campaign by companies in the tech industry to inflate their importance to the overall economy. Once the technological companies are able to do so, they will be in a better position to lobby the government and ask for more benefits.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.