Opinion: GDP is no longer a reliable compass | Opinion | DW | 23.02.2018
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Opinion: GDP is no longer a reliable compass

Gross domestic product (GDP) figures may continue to be released like clockwork every quarter, but they increasingly provide an incomplete picture of economic activity, argues Swiss economist Thomas Straubhaar.

Unfortunately it is not a joke, but the frightening truth. gross domestic product (GDP) has a list as long as your arm of shortcomings in how it captures, calculates and interprets growth, but it still remains the only serious yardstick for measuring macroeconomic activity.

As if the measure were based on entirely sound data, every publication of distinction in the science and business field will produce quarterly or annual forecasts of how GDP will move in the short and medium term, and those data are reported with all seriousness by the media.

Focusing purely on GDP and its movement is a bigger delusion than ever, and that's not because of the classic leftist critique, which insists that GDP only reflects prosperity as a whole but says nothing about its distribution, and that is why it can not be an indicator of the wealth of a society. The new re-evaluation is far more rudimentary. It centers on the fact that the GDP measurement has completely lost touch with reality.

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GDP is already limited in its ability to reflect the structural change of the past three decades from the "real" industrial economies to the "invisible" service and knowledge society. In the age of digitization, GDP is no longer a reliable thermometer of the economic climate.

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Predictions, right or wrong

New technologies have shifted an increasing share of value creation into virtual domains beyond the physical reality of goods. For many, the innovations of the digital world have become detached from space and material, so therefore several key macroeconomic metrics are simply missing. These digital goods and services provided online are best only partially captured.

If modern apps or platforms, such as Uber, Car2Go, or Airbnb, enable a sharing economy, and thus far more efficient use of existing goods, cars, or housing, then GDP will, if anything, only be based on rudimentary approximations.

Value added online is not recorded

A considerable number of consumer goods and services are made available on the internet almost free of charge, and therefore their value does not appear in the GDP figures. But they still replace the purchase of traditional "brick and mortar” products that have always been included in GDP data.

Professor Thomas Straubhaar (picture-alliance /dpa/J. Kalaene)

Professor Thomas Straubhaar

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So, if Wikipedia allows access to an online encyclopedia and YouTube permits users to play videos and films, or if nerds upload their self-created games, software, music videos or photos, then the end-user gets something for nothing.

So while consumer satisfaction or well-being rises as a result of the purchases, GDP falls because fewer dictionaries or DVDs are being bought.

The same applies if the traditional print media is replaced by freely accessible electronic news portals. Although consumers receive free, fast and easier access to information, GDP drops, because newspapers and magazines lose advertising revenue, resulting in layoffs and lower added value to the economy.

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The sharing economy and fair competition

The creation of value on the internet, such as the virtual trading in digital data and the effects of a sharing economy, in which high-value durable goods such as apartments, cars or electrical appliances are shared and not individually acquired, create huge headaches for those trying to analyze their contribution to economic growth.

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That is why GDP and its methodologies are less reliable than ever. Recognizing this is a minimum requirement for the economic community going forward, which has to find new and better methods. The media and the public also need to know how nonsensical it is to worry about marginal fluctuations in GDP, or even to spread fear or euphoria, when fundamental errors put the whole notion of its calculation into question.

Beware the pursuit of false number fetishism in the desire to create ever clearer GDP figures. The seemingly precisely calculated predictions lack the firm foundations to meet the requirements of the digital age. That's why they are no longer of a high enough caliber to serve politics and economics as a reliable economic guide.

Thomas Straubhaar is Professor of International Business Relations at the University of Hamburg. He was previously director of the Hamburg Institute of International Economics (HWWI).

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