Redressing Gross Domestic Product: Is that the way ahead ?

Recently the United States of America (US) decided to rewrite the financial history of the work. The US
decided to change the way it interprets the term Gross Domestic Product (GDP). It has decided to switch
to a new definition of GDP which may make its GDP look rosier and probably redress its financial
statements. After the introduction of this new policy (July 2013) American books are going to be rewritten right from 1929. How will it affect us and what is the strategy of US behind this new definition is
what we are going to discuss in this article. The US introduced the concept of Gross Domestic Product
just after Second World War when the IMF and World Bank were setting up. The US was the guiding
economic power in the world at that time. It helped set up the Bretton Wood system and standardised the
economic indicators in all countries by the introduction of the term GDP. However, it seems that America
has seen a need to redress its definition of GDP. America no longer remains the driving economic factor
of the world. Recent economic crisis of 2008 has exposed its vulnerabilities to the world and to its own
people. By changing the definition of GDP how it proposes to build its name is a thought to ponder upon.
For the last sixty years since the introduction of GDP, it has been used as an important indicator to
measure the level of economic activity in an economy. It has become such an essential part of the
economic jargon that today every economy be it a growing one or a backward one measures their
economy in terms of GDP. Developing countries like India and China completely rely upon the targets
they set in terms of their GDP growth rate. Similarly the crisis level in the Euro zone countries is also
measured as a fraction of their GDP. People use the terms GDP and economy interchangeably today.
Inherently, the GDP of any country measures the market value of all the goods and products produced in
an economy. There are broadly three defined methods to calculate the value of GDP. GDP can be
calculated as defined above by adding the entire value of all the goods and products produced in the
economy. It can also be calculated by an expenditure approach and the income approach. Expenditure
approach considers that all the goods produced in the economy are in some way or the other utilised
within that economy. Henceforth measuring the expenditure within the country helps in calculating the
GDP of that country. Similarly income approach measures the total income of all the producers with in
the country.
Gross Domestic Product was an indicator to calculate the entire production of the country. It was never
supposed to be so wrongly used as an indicator as it is done today. Measuring the economic growth has
more to do with the social development than its economic counterpart. GDP has a myopic approach in
which it defines the growth of an economy. It does not talk about the real growth. It does not talk about
the literacy rates or rising levels of employment in an economy. It talks more about industrial production.
Even though the GDP of a country may reflect it in economic terms but it is never able to estimate the
exact amount that is spent on each individual in the nation. As a hypothetical illustration, if we assume
that GDP measures the amount of electricity used in a house then it doesnt focus on whether the
electricity used is actually put to a beneficial use or not.

The case of US rewriting its method to define GDP is a classic example of how much importance
countries give to GDP. The recent declaration of the US to change the way it is going to calculate GDP
speaks about the inclination of American government to redress its financial blunders and probably to put
up a rosier picture. The American government has decided to add all the intangible assets into its GDP
numbers. The implications of the above decision are enormous. Intangible assets include the money spent
on making movies, research and development. Previously, the money spent on research and development
was used to feature in the form of products that were sold when the research team were able to derive one.
However, with the current choice of definition all industries are going to look pretty different from what
they look now. It is estimated that more than 400 billion US dollars would be added to the American GDP.
This is nearly a 3% jump in the GDP numbers. To visualise it in a much better sense, adding 400 billion
USD to the current size of American economy is like adding a country like Poland to its existing
economy.

What this redress is going to do to the American economy is interesting. It will put a much better picture
of the current state of its economy. Individual data of all the industries would state that the country is
advancing at leaps and bounds. America is currently standing at a debt to GDP ratio of about 107. Putting
an intangible asset of about 400 billion USD to its GDP value would definitely change the way world and
its own people will perceive the American economy. It is proposed that the debt to GDP ratio of the
American economy would come under 100 after the inclusion of intangible assets to its GDP. American
government is definitely going to reap loads of benefit by the new picture that it is going to portray in
front of the world. In reality, this change is not actually beneficial to anyone. It may delay the current

problems of numbers but would definitely leave a big question mark for its future. Though, US may have
tried to catch up with its debt through this new methodology but this whole beautification is not going to
stay for a much longer time. Its debt will catch up sooner or later and at that time America would
definitely be in a much greater fix.
Today the world progress is defined more in terms of GDP numbers rather than the sustainable provisions
made for people in the third world countries. Though, America may have been able to portray itself on a
higher success rate but in terms of true growth rate this is mere eyewash. GDP is never going to be the
right indicator of economic growth. It is never going to be an exact parameter when it comes to the
quality of lives of people. It will always remain a mere indicator of the levels of production whether we
include intangibles assets or not. This insight should be a food for thought for everyone. What kind of
standards do we have to set to bring in the human index into the definition for growth??