Tags: Gates | GDP | measure | economy

Bill Gates: Using GDP to Measure Economies Understates Growth

By Michael Kling   |   Thursday, 09 May 2013 07:58 AM

Gross domestic product (GDP) is widely regarded as the foremost measurement of a country's economic size and vitality. However, it's inaccurate, and wildly inaccurate for many emerging market countries, asserts Bill Gates in an article for Project Syndicate.

GDP's inaccuracy is an issue for policymakers as well philanthropists like himself who advocate helping the world's poorest people, says Gates, the former Microsoft chief and founder of the Bill & Melinda Gates Foundation.

"GDP understates growth even in rich countries, where its measurement is quite sophisticated, because it is very difficult to compare the value of baskets of goods across different time periods," he writes.

Editor's Note:
The Truth About the Economy — Government Documents Lead to Eerie Conclusion

For instance, encyclopedia sets were valuable in 1960, but now kids can look up anything on the Internet.

"How do you factor that into GDP?" he asks.

Calculating GPD is especially difficult in sub-Saharan Africa, Gates notes.

In his new book, "Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It," Morten Jerven, an assistant professor at Simon Fraser University, "makes a strong case that a lot of GDP measurements that we thought were accurate are far from it," Gates writes.

Citing Jerven, Gates explains that African countries have large subsistence economies that are difficult to report and are systematically underestimated. Countries do not update their reporting enough and therefore do not account for large, fast-growing areas of economic sectors, like cell phones.

And there are different ways to calculate GDP that produce wildly different results. One may say GDP grows several percentage points, while another may report it shrinks.

Researchers should use other tools, like demographic and health surveys and satellite mapping of light sources, to estimate economic growth, Gates argues. "Although such methods are not perfect, they also are not susceptible to the same problems as GDP."

Other imperfect but helpful measurements include statistics on education, nutrition and sanitation. Economists can also measure costs for the same basket of goods in different countries to compare purchasing power and adjust GDP.

"[I]t is clear to me that we need to devote greater resources to getting basic GDP numbers right," Gates says, advocating for more outside help for national statistics offices in Africa.

"The better tools we have for measuring progress, the more we can ensure that those investments reach the people who need them the most."

"If ever there was a controversial icon from the statistics world, GDP is it," states an article in the OECD Observer run by the Organisation for Economic Cooperation and Development. "It measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment. Yet, governments, businesses and probably most people swear by it."

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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