1. The Bargaining Power and Value Added
The strongest defect of
the GDP interpretation is related to the idea that the value added is
distributed among agents who create the final product in accordance with
objective characteristics of their activities. It means that everyone obtains a
share proportionally to his contribution to the creation of value. Such
distribution can indeed take place under conditions of perfect competition
(allocative efficiency), when all economic agents have equal bargaining power
and absolute freedom to choose counterparties. In the real life it is all quite
different. There is inequality in the parties’ bargaining power, which can be
caused by a considerable number of reasons. The main ones include a monopoly,
including that for intellectual property, market entry barriers, technological
backwardness that limit the choice of the dependent party, etc.
2.
Problem with Measuring Value of the Product
Another key problem of
assessing the level of GDP is related to the base for calculating it – the value
of the produced (consumed) products. Prices are an excellent instrument for
measurement in the market economy when the value of any product is limited to
two borders – the upper one that reflects the utility of goods (the possibility
to substitute one good for another), and the lower one that reflects the level
of socially required costs for its reproduction. In other words, buyers will
not demand this product if it can be substituted for another one, more
efficient in terms of the price-quality ratio, and suppliers will not supply
this product if the revenue they get does not cover the costs incurred. That is
why under the conditions of market pricing, the value measurement allows to adequately
compare various sets of products. The situation is completely different when
the state acts as a buyer of a certain product (or as an entity that finances
the production of relevant goods and services). Is it possible to consider that
the money spent by the state to finance the construction of super-stadiums, new
R&D, purchase of equipment the lion’s share of which includes logistic and
transaction costs, purchase of monopolists’ products for state needs, etc.
reflects socially required costs for production of relevant products? Even if
these goods really meet current or future public needs (that, unfortunately,
does not always happen), it is necessary to take into account that when there
is no competition, any seller’s aim is to justify the need for increase in the
amount of money invested in the project. Of course, there are many methods of
justifying the value of production costs approved by the state. However, under
conditions of asymmetry of information, the probability of irrational spending
of state resources is quite high. In other words, under conditions of a
considerable share of state expenses GDP will be higher if costs for the
production of goods ordered by the state are higher. At the same time, such
costs are likely to include costs of creating unnecessary goods and costs of
obtaining administrative rent.
3.
Imposed consumption
Limited resources are
often spent on imaginary rather than real needs of the society. Using the monkey
on our shoulder method , manufacturers impose on consumers the products and services
that they absolutely do not need and that sometimes are even harmful for them.
The flourishing of the consumer society where the status of a thing means much
more than its functionality questions the ability of the market to ensure
allocative efficiency. The main task of the manufacturer is to constantly
update the existing products, to create a little meaningful difference in the
models and characteristics of products of the same type. Even in such areas as pharmacology
that is far from conspicuous consumption, great funds are spent on developing Main Problems with Calculating GDP as an
Indicator of Economic Health of the Country.
Another problem is the
exaggeration of GDP by so-called “imposed” services that citizens of the
country do not actually need. For example, additional medical services imposed
on the patient are widely spread. Similar examples can be found in insurance
and legal area.
4.
Not taking into Account the Value of Products Created by Households
GDP does not take into
account products created within households. In developed countries, a household
can choose the way to meet its needs: to do some work on its own or to seek the
assistance of others in exchange for money. If a work is done “for personal
needs”, it is not taken into account when calculating the GDP. It turns out
that the value of the vegetables grown in the kitchen garden is not included
when calculating GDP, while in case of those bought in the supermarket it is
included. Under conditions when production of most consumer goods and services
returns to the households (food production in home appliances, apartment
cleaning by vacuum cleaners robots, washing and cleaning clothes in washing
machines, etc.), ignoring the results of households’ production activities can
cause a serious underestimation of the actual volume of production in the
country. This problem will be further deepened as the prices of 3D printers that
make it possible to produce many items of clothing, shoes etc. at home become
lower.
5.
Underestimation of Turnover within Sharing-Economy
The GDP includes
neither households’ production nor works and services provided by households to
one another with no charge. Meanwhile, today we are witnessing the emergence of
a new type of economy – the sharing economy that involves not only the joint
use of property, but also the inclusion of many households in the networks of
mutual services. In this case, households can act in two different roles – as
providers of commercial services and as participants in reciprocal transactions.
The most important difference between the reciprocal transaction and the
bargaining transaction is the lack of a goal to obtain income as the leitmotif
of interaction among the participants. In the case when a car owner pick his
friend up, and the latter pays for the gasoline, we deal with mutual assistance
rather than with market exchange. Even now it is possible to single out the
following types of sharing economy related to the interaction of households:
increase in the volume, capacity and speed of using private resources by
combining them (Skype, Torrent, libraries and film libraries), joint use of a
resource owned by one person; creation of a network where households exchange
baby clothes, books, records, information, the right to use temporarily
available real estate, exchange of services – creation of networks of mutual
assistance (doctors, teachers, drivers, and repairmen). It is also possible to
exchange services in the form of knowledge, information etc. At the moment most
of the relevant transactions are not taken into account when calculating GDP.
6.
Using Base Prices When Calculating the Real GDP
The nominal value of
GDP is greatly influenced by inflation. Therefore, the value of the real GDP
cleared from the influence of price changes is usually taken as the main
indicator. When calculating the real GDP, the value of final goods and services
is measured in base prices, i.e. the prices that have been formed in the
markets of goods and services during the period taken as the base. However, the
structure of output does not remain unchanged: the ratio of certain goods and services
in the total volume of output changes, new goods and services appear, and their
quality Victor is being improved. For example, in high-tech industries,
technical characteristics of new products can be considerably higher than those
of their analogues of the base period, but this will not be reflected when
calculating the real GDP. Likewise, improvement in the quality of services
provided this year (for example, more efficient diagnostic procedures) will not
be taken into account.
Finally, the appearance
of fundamentally new goods is not adequately reflected in the real
GDP indicator because
there are problems with determining prices of the base period.
7.
Measuring GDP using Purchasing Power Parity (PPP)
For international
comparisons, GDP (PPP) is often used. To calculate it, the nominal GDP calculated
in a national currency is adjusted according to the purchasing power parity
(PPP). However, when calculating the purchasing power parity, several problems
arise. Firstly, the standard consumer baskets in different countries cannot be
absolutely the same, because consumer habits and preferences differ from
country to country. Secondly, goods and services that have the same name can
vary considerably by their quality. Thirdly, statistical sources of information
are not always uniform, and the number of observations is not always sufficient
to adequately assess price differences.