Is GDP the Best Measurement of Economic Growth?

Numbers are only representations of ideal states and are in and of themselves subjective to what they measure. A paper by Stow & Stow (2013) discusses some of the fallacies of relying too heavily on Gross Domestic Product (GDP) without considering the deeper meaning of the numbers. Fallacies of judgment can occur when governments adjust their economy to improve upon GDP but don’t look at actual economic activity.

GDP is calculated by adding =C+I+G+NX. Any improvement in consumption (C), Investment (I), Government Spending (G) and Net Exports (NX) would result in an improvement in overall GDP. The numbers could be misleading in the long run and lead to poor policies decisions.

When consumers spend more money they are not necessarily improving total wealth of the nation even though GDP rises. They are simply spending their money, dwindling their savings, buying now instead of investing later, and taking on debt. They may be encouraging organizational profits but not exclusively the wealth of the nation as an entire economic system. 

A similar fallacy can be found in government spending where an increase in expenditures can raise GDP numbers that don’t actually reflect national growth. Spending more today has obvious costs in terms of debt, flexibility, and confidence that are not calculated into the factor. Spending should be in areas that improve overall wealth or reduce liabilities. 

The paper is solid in the sense that numbers are only just numbers and relying on them too heavily can lead to policy mistakes that can be costly down the road. Overreliance on a single number encourages greater government spending and interventionism that can be self-perpetuating as politicians seek to justify new and expanded budgets at the detriment longer term sustainability. Using a battery of different numbers can help provide a greater context more data points to understanding true growth and development. 

Strow, B. & Strow, C. (2013). Gross Actual Product: Why GDP Fosters Increased

Government Spending and Should Be Replaced. The Journal of Private Enterprise, 29(1)

A Culture of Economic Engagement Creates National Growth

Culture and economics not often something that are seen together as its smacks of elitism. However, culture as a belief system has a noticeable impact on societal behavior and the everyday choices people make that contribute to economic development. A paper by Svetlana Overbaugh, indicates that culture should be a major consideration in the determination of countries that are ripe for international investment and growth (2013).

Falling trade barriers, communication improvements, and shipping improvements have opened the markets to major change. Those nations that are likely to succeed have the right culture and infrastructure to capitalize on this change. As Asian countries zoom ahead in growth, Americans and Western European nations continue to lose market share. The time for regeneration based upon basic cultural principles may be needed to reclaim the marketplace.

The degree of economic freedom and the pace of a country’s growth influence its economic competitiveness (Johnson & Lenartowicz, 1998). The Organization on Economic Cooperation and Development (OECD) defines global competitiveness as the ability of a country to produce new products that can successfully compete against other countries in the global marketplace (2011). Economic growth becomes a process of turning out the new and unique.

If we travel back in time we can find that Adam Smith (1776) believed that self-interested actions of many market participants leads to efficient allocation of resources that can result in higher productivity and economic growth. Other ancient theorists such as Tucker believed that countries become rich due to the desire to develop new knowledge, learn, and apply this knowledge in new ways (1776). Thus, economic development is rooted in the cultural underpinnings that afford opportunities to develop new knowledge and use that knowledge to enhance international sales and profits.

The author relied on Hofstede’s Cultural Dimensions Model and economic activity to determine competitiveness.  The six cultural dimensions of power distance, individualism/collectivism, masculinity/ femininity, short/long-term thinking, and indulgence/restraint were part of the evaluation process. They are important because once the cultural underpinnings have been established they reinforce social rules and norms on society.

Even though the study focused on smaller post-communist countries, they also offer a glimpse into why some countries are growing and why some are not and this has broad implications. The Author found that since national culture impacts every aspect of social life it is necessary to foster innovativeness and human development within that culture to foster economic activity. It is the choices of many that make a viable system.

The author found that two cultural attributes of power distance and uncertainty avoidance have the greatest influence on growth. When power-distance relationships are low all members of society are encouraged to work and grow while low uncertainty avoidance encourages a higher entrepreneurship stance that takes chances on new products and services. Growth is through egalitarian and supportive risk-taking perspectives.

Beyond this report, we can see that those cultures that influence norms on productive innovativeness and human development also see higher levels of GNP development. These cultural attributes are based in the way people think about their place in the economic system. Through maximum engagement of all members of society in the self-enhancement, of their personal lives and their economic spirit of creation, the system can transform itself to a high product and service development society that reaps the rewards of international competition.  Culture must engage, encourage, and reward individuals or those who can offer the most are stifled under poor reinforcing economic structures that lead to a path of decline for a nation and its people.  The best and brightest must rise if there is to be hope for a better future.  Is it what you know or who you know that filters its way into your decision-making process and management decisions?

Hofstede, G. H. (2001). Culture's consequences: Comparing values, behaviors, institutions, and

organizations across nations (2 ed.). Thousand Oaks, CA: Sage.

Johnson, J. P., & Lenartowicz, T. (1998). Culture, freedom and economic growth: Do cultural

values explain economic growth? Journal of World Business, 33(4), 332-356.

OECD. (2011). Retrieved ft-om OECD:

http://www.oecd.org/home/0,2987,en_2649_201185_l_l_l_l_l,00.html

Overbaugh, S. (2013). National culture, country-level competitiveness, and economic development. International Journal of Business and Economics Perspectives, 8 (1).