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Financial Adviser: 5 Reasons Why GDP Does Not Measure Economic Prosperity

Just because the GDP is growing doesn't mean everyone is benefiting from this growth
By Henry Ong |

 

 

Last week, the Philippine Statistics Authority announced that the Gross Domestic Product in the fourth quarter of 2016 grew 6.6 percent, higher than the 6.5 percent growth in the same quarter last year.

 

This latest quarterly result brought the entire 2016’s GDP growth rate to 6.8 percent, higher than the 5.9 percent growth in the previous year, making the Philippines still one of the fastest-growing economies in Asia. Riding on this strong momentum, the economic outlook for this year has remained robust.

 

Expectations of higher economic growth mean more business opportunities. Business decisions about expansion will be based on the assumption that a growing economy will mean higher consumption spending as a result of rising disposable income.

 

While a high GDP growth rate measures how businesses will grow in terms of sales this year, the strong growth prospects of the country do not necessarily measure economic prosperity for everyone. Here are the five reasons why a GDP growth rate is not a complete indicator of economic progress:

 

 

1. It does not measure financial well-being

Imagine yourself as the Philippine economy. Your GDP growth rate is measured by how much your spending has grown compared to the previous year. The more you spend, the better your GDP growth is. But does that measure how wealthy you are?

 

There is a saying that to become financially independent, it is not in how much money you make but in how much money you save. When you spend, it is either you use a portion of your income for consumption, or you borrow money from a credit card or take out a loan that you will eventually pay out of your income. For all we know, you may already be deep in debt after you have maxed out all your credit cards last year.

 

While GDP growth rate is a good indicator for business decisions because it is a measure of the potential increase in aggregate demand for goods and services as consumption spending rises, GDP growth rate does not capture the progress of financial well-being of the average person.

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2. It does not measure living standards

If you have to work Monday to Saturday every week in order to earn the same income of someone who only works three times a week, then you may not be improving your lifestyle condition.

 

You may be working too hard that you neglect the time you need to spend with your family and children. You may also need to work double time by getting an extra job on your free time to earn enough income to meet rising expenses at home.

 

GDP growth rate may be accounting the increase in your income because of the extra number of working hours that you spent but does not necessarily measure how your living standards have improved.

 

 

3. It does not measure quality of expenditures

Infrastructure spending is a big component to GDP growth. Last year, government consumption comprises about nine percent of total gross domestic product and grew by about 8.3 percent, higher than the previous year’s growth of 7.8 percent.

 

While government spending is good for the economy because it creates a multiplier effect that causes production from different industries to also increase, there is no way to measure if these expenditures will have lasting benefits. For example, there may be government projects that may not last long because of overpriced construction materials used that may later prove to be of low quality.

 

In the same way, as a consumer, you may have also spent your money on things that do not give you lasting benefits. For example, instead of investing your money in financial education seminars, you spend it by buying expensive concert tickets.

 

Whatever you spend, no matter how superior or inferior it is, or whether it is beneficial or not, GDP will account it as positive to the economy. It will be counted as an increase in expenditures.

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4. It does not measure social costs

There are economic activities that may threaten depletion of natural resources, damage the environment and other long-term negative consequences. For example, mining production, which grew by eight percent last year, may cause long-term damage to the environment that can lead to frequent floods or loss of livelihood of residents. 

 

Another example is the pollution caused by the manufacturing sector. Pollution can create health damage to nearby residents that can lower productivity and income. The actual costs, as well as the social costs that result from these losses and damages, are not accounted for by GDP.

 

 

5. It does not measure income distribution

GDP per capita is computed by dividing the total Gross Domestic Product by total population. The concept of per capita explains that the increase in GDP per capita must have the same increase as that of GDP growth rate.

 

However, when the population of the country increases, more people will be sharing the growth in the economy, thus diluting the increase. For example, the GDP growth rate for 2016 was 6.8 percent but the corresponding GDP per capita grew only by 5.1 percent because the total population last year also increased by 1.6 percent from 101.6 million to 103.2 million.

 

While this per capita metric looks like a fair indicator, it only accounts the economic status of the population by averaging. It does not address the inequality in wealth distribution.

 

GDP per capita does not measure how the increase in income is shared by the poor and rich. How has the economic growth benefited the poor? It is possible that the economy is growing but only few are benefiting from this growth. The rich get richer while the poor get poorer.

 

 

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Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice hong@businesssense.com.ph or follow him on Twitter @henryong888 

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