This post was originally written as a exposition for private circulation back in 2020, I’m sharing it as I believe it still has some value to contribute, and as the intervening passage of time has erroded any embarrassment I may have had in my potential naivety of perception on the patterns prevalent in the world. Also, it provides some neat insight to the conceptions, or lack thereof, I had when I just turned twenty five.
GDP is not designed nor originally intended to be used as a metric for comparing countries. It was designed for assessing year-to-year changes in a given currency region, usually coextensive with a county.
GDP (PPP) is an attempt to allow for inter-country comparisons, however it is based on a common basket of goods that are not representative of the entire economy. It is a flawed metric that probably underestimates the differences. The true value is likely somewhere in between GDP and GDP (PPP).
Neither measures are meant for assessing real wealth, the actual size of the productive economy, or tangible work, or anything that doesn’t show up on a balance sheet. These are economic metrics that can be “cheated” in a sense.
For example, paying someone to dig holes in the ground and then fill the holes back up would count as GDP. If the size of payments for hole digging and filling increase year-on-year then that would also count as GDP growth. Even the actual number of holes dug and filled could stay constant as long as payments increase.
Generally it is assumed that the vast majority of GDP, and GDP growth, is tied to actual productive efforts. I.e. many assume that the GDP economy ~ real economy, otherwise vastly more nuanced, and inconvenient, metrics would have to be used, many of which requires understanding outside the educational background of current decision makers.
However as recent events have shown, the animating forces of the GDP economy are not necessarily equal to the animating forces of the real economy. Just as the balance sheet for a company only captures a certain perspective, the balance sheet for a nation’s economy only captures a certain perspective.
In the future, farsighted government organizations might decide to focus on assessing the real economy and achieve results similar to private companies focused on assessing real economic factors.