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Where GDP is from, and what does that tell us?

GDP expert Diane Coyle explains where GDP came from, and how it reflects what people needed the state to do at that time
My name’s Diane Coyle, I’m a professor of economics at the University of Manchester,
and I’m the author of a book called GDP: A Brief but Affectionate History. The first time anybody started to try to measure the economy as a whole, was during the late 1920s, and 1930s in the US and UK in particular, as a response to the Great Depression. It was the first time governments felt they needed to get their arms around what was happening to the whole economy. They had some individual details like how many banks were failing, or how much steel was being produced. But with the expansion of the franchise in the early 20th century, that was the first time there was an expectation the government would do something about the state of the economy, and therefore the first measurement.
But the measures people constructed in the 1930s were very different from what we ended up with as GDP. GDP, itself, was a creature of the Second World War. Keynes, in particular, wanted to know what consumption sacrifice populations needed to make in order for the war effort to be sustained, what production resources were available for fighting the war effort. So GDP, therefore, included defence spending, in particular, which had been excluded from the earlier measures. The first attempts were attempts to measure economic welfare, and what we ended up with GDP was a measurement of economic production, or expenditure, and they’re related but they’re different things.
Simon Kuznets, who’s often described as the father of GDP, actually was opposed to what we ended up with as GDP. He wanted that it was not a measure of social progress, and he was much more focused on constructing some aggregate that would give governments exactly that measure– how is the economy progressing? How is society progressing? The origin of the worst statistics is state, and I think you need to step back and ask yourself, what is it that the state needs to be measuring? What are we expecting our governments to do? And when GDP was created, it was to prevent depression recurring, and make sure that there was victory in the war. What do we needed to do now?
Well, I think we do want some thinking about progress and economic welfare, and taking it back to the origins in welfare economics.

In this video, economist Diane Coyle takes us through the origins of GDP as a measure of economic growth and what this should mean for our assessment of it today.

She points out that the context in which GDP emerged, and the challenges the global economy faced at the time were very different than the ones we face today. At the time, GDP was developed as a tool to help understand the economy during the Great Depression, and then to make sure the economy could cope with the war effort during the Second World War. As she points out, if reflects the challenges of the times, and what we wanted the state to do at the time. Now, our economy faces a very different set of challenges.

What do you think?

Diane Coyle says that what the government measures reflects what we want it to do. If our measurements were made for the 20th century, how can they be updated for the 21st century?

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Global Prosperity Beyond GDP

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