Saturday, January 6, 2018

Why It Is Time to Change the Way We Measure the Wealth of Nations: The Problems with GDP

By David Pilling

Imagine two people. Let’s call them Bill and Ben. Bill is a mid-ranking investment banker who clears £500,000 a year after tax. Ben is a gardener who takes home £25,000. Who is better off?

If we judge them by their income, then Bill is clearly richer; 20 times richer, to be precise. But who is wealthier? For that, you’re going to have to know more about their stock of assets and broader circumstances.

In national accounting terms, Bill’s £500,000 salary is the equivalent of gross domestic product. It is the “flow” of income earned in a year. But, as any mortgage lender knows, that doesn’t tell you anything about his wealth or his salary next year or the year after that.

Did I mention that Bill is up to his neck in debt after a crippling divorce, or that he has an expensive cocaine habit? He’s sold off most of his assets, including his vintage Harley-Davidsons. All he is left with is a costly mortgage and several payments on his (scratched-up) Porsche. At 59, he’s also washed up at work. In fact, he is about to be fired when the bank shifts its derivatives trading team from London to Frankfurt.

Ben, meanwhile, lives in the £100m country estate he inherited from his great aunt. On the weekends, he potters about for fun in his own Versailles-inspired garden, paying himself a nominal salary.

This year, before he turns 21, he plans to sell the estate and move into a modest flat in Knightsbridge. He’ll invest the £95m he has left over and live off the interest while he completes his studies as a patent lawyer, a profession that should earn him a bit of pocket money in the years ahead.

Now who looks richer? Bill the banker or Ben the gardener?

Michal Kalecki, the Polish economist, is said to have described economics as “the science of confusing stocks with flows”. Investors scrutinise a company’s balance sheet as well as its profits and losses. Yet, when it comes to sizing up a nation, we are mostly stuck with GDP, which counts the value of goods and services produced in a given period.

Read the rest here.

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