Divided GDP

Greig Read

GDP (Gross Domestic Product) is recognised as a flawed metric yet it is widely used for economic planning. Various alternatives have been proposed (HDI, IHDI, GHI) but they are not as useful as GDP and as long as we are stuck with such a crude measure very little progress will be made toward a sustainable economic system. GDP has too much cache to be overthrown but it is possible to increase its accounting and predictive utility in a very pragmatic way that encourages sustainability.

GDP is relatively crude measure that excludes the run down of capital or resources, ignores income inequality and does not distinguish unproductive consumption (eg gambling). Parts of these problems are mixed through each of the terms in the GDP equation. However by categorising these components it is possible to derive an additional equation that produces three new terms with sharper economic utility.

GDP consists of consumer spending and capital investment plus government spending and exports minus imports. Each of these components is derived from collected data which could be readily categorised into “Productive” (increases efficiency, resources or output), “Core” (meets direct needs) and “Structural” (does not directly provide consumer goods or services). For example, components of government spending can be classified as “Productive” spending like research , “Core” spending like community grants and “Structural” spending such as defence.

Thoughtful placement of the contributors to GDP into the three categories would produce valuable economic guidance. Extractive industry investment is “Structural GDP” since it does not directly create a consumer product and it is drawing down a limited factor of production. Spending on fuels and power is also “Structural GDP” since the individuals only directly consume the services derived from energy such as transport, lighting, cooling. “Structural GDP” would include consumer debt repayments, fines, legal services and social security payments, all of these are necessary for social function but do not directly contribute to desired goods and services. Other less necessary examples would include gambling and other activities that produce monetary derivatives but no actual good or service.

On the other hand investment in recycling increases resource efficiency and therefore is “Productive GDP”.

Capital investment in renewable energy is “Productive GDP” since it increases available energy resources. Other examples include new housing, education, transport infrastructure and better communications. All of these are desirable in a progressive economy and increase long term productivity.

“Core GDP” would include food, clothing, transport, maintenance, replacement machinery, white goods, existing housing, trade services, health, phones etc. In fact “Core GDP” is most easily defined as components not clearly in the structural or productive category and could be used to catch all uncategorised components so as to simplify calculation and ensure the mathematical integrity of the total.

Imports and exports can be similarly categorised. Primary production exports would be “Structural GDP” unless valued added for direct consumption. Imports are a negative quantity in the GDP formula and may only be applied to reduce total “Productive GDP” or “Core GDP”. It might be cost effective to “off shore” some “Structural GDP” components but it is actually much better to reduce the need for components like prisons, military weapons, extractive industries, social security and financial arbitrage.

To begin with, only major industry groupings need be categorised but refinement over time, depending on data availability, would improve the diagnostic value of the three GDP types in predicting supply and employment. A country with too little “Structural GDP” would be unstable while too much would be a drag on real growth. Too little “Productive GDP” would indicate constraints to future growth. The recent mining boom in Australia would have shown growth concentrated in the “Structural” category presaging restrictions on domestic supply and employment.

Dominant “Structural GDP” also implies high internal social costs and concentration of opportunity that would restrict income equity.

I would hope that countries would no longer just seek to grow GDP but to improve the quality of that growth by favouring “Productive GDP” and using policies that prefer “Core GDP” over growth in “Structural GDP”. This approach would tend to improve the availability of goods and services to citizens while encouraging transition to
a more sustainable economy.

Greig Read is a NSW member of ERA