GDP Comparisons Across Time

This continues a sequence of posts aiming to show how apparently objective statistics conceal large numbers of arbitrary value judgements.  (1) Lies, Damned Lies, and Statistics, (2) Subjectivity Concealed in Index Numbers, (3) The Values of a Market Society, (4) Cross-Country Comparisons of Wealth, (5) Purchasing Power Parity, (6) Downfall of Rhetoric in 20th Century, (7) Facts & Values: Distinction or Dichotomy?. This is the 8th post, which considers comparisons of GDP across time within a single country.

In comparisons across countries, we face the difficulty that the concept of “wealth” has varied across societies, and changed with time. The “average basket” of goods varies for each country, because different societies have different preferences and values. We cannot compare apples and oranges. It seems that these problems would be reduced if we considered a single society across time. The concept of wealth, and the average bundle of goods would remain relatively stable, at least across short periods of time. We will now discuss difficulties which arise when we consider growth across time, comparing GDP across the years for a single country.

Turning back to Table 1, we can see that all of the GDP values are increasing as time goes on for all of the countries in the Table. Does this mean that GDP has been growing in all of these countries? Well, may be “no” since the values in the Table are in local currency units. The increase may be due to increase in prices or it may be due to increase in quantities. Therefore, without knowing which increase is dominant, one can not be sure whether GDP really increased or not.

To see how deceptive just looking at the numbers can be, the case for Turkey for the years 1978 – 1988 is useful. The country experienced very high inflation over this period of time. Table 2 summarizes the information.

Table 2: Inflation and Growth of Turkey (1978 – 1988)

Year	GDP (LCU) (Billion TL)	Growth     (%)	Inflation    (%)
1978	1.58	2	50
1979	2.78	-1	76
1980	5.23	-2	88
1981	7.9	5	51
1982	10.5	4	33
1983	13.9	5	33
1984	22	7	58
1985	35.1	4	60
1986	51.1	7	46
1987	74.7	9	46
1988	129	2	73

Second column in the Table is GDP in current LCU, that is Turkish Lira. GDP in 1978 was 1.58 billion TL and it was 129 billion TL in 1988 which is close to 100 times growth but actually the growth over the period was not that high. Most of the growth was due to inflation, as shown by the numbers in the last column. After deducting the inflation, the growth rates are actually quite low. So, it is clear that direct comparisons of GDP in current LCU are false and misleading. The table provides the “official” statistics, as recorded in the World Bank WDI Data set. It separates the growth in LCU into two parts. One part is the rise in prices, or inflation, while the other part is the growth of the “real” GDP, which measures wealth according to official statistical accounts. How objective is the official method, as a way of measuring real GDP, and thereby enabling us to compare the wealth of Turkey over time? We will examine the subjective values hidden in the way these numbers have been manufactured.

External and Internal Critiques of the GDP

From one year to the next, the GDP changes in many different ways. The quantities of the goods produced is increased, technological changes make the quality go up, the prices also increase, new products are introduced, some products become obsolete. Can we wrap up all of these changes and summarize them by ONE number? The simple answer is NO – this is impossible. Over time changes take place, and these can be characterized qualitatively. Using old fashioned rhetoric, a writer arguing that Turkey is making progress and experiencing growth would talk about how we have more and better roads, we have more educational institutions of higher quality, we are manufacturing high quality products, and exporting them, and similarly describe the many dimensions of change taking place in positive ways. An opponent who want to argue in the opposite direction might say that real wealth consists of friends, family, and social relationships. As the people of Turkey get more and more engaged in production of artificial goods which make no genuine contribution to our lives, we are losing our traditional values which enriched our family and social lives. Instead of learning to be human beings, our education is turning us into human resources, to be used just like machinery is used, as inputs to the production process. So, Turkey is becoming poorer, when wealth is properly understood in terms of what makes us genuinely happy, enriches our lives, and develops our human capabilities.

In the modern rhetoric, all of this discussion and debate about values is buried and concealed beneath the apparently objective official statistics. Which factors should be chosen as measures of wealth? This is not under discussion; it is automatically assumed that all products produced and sold as final consumer goods are the wealth of the nation. Once we recognize the value-based nature of this choice, there are two types of criticism which we can make of this choice of factors. The first is an internal criticism, which accepts the idea that wealth should be defined in terms of material resources, but says that we are missing essential aspects of this material wealth because they are not sold in the marketplace. Among these, the informal education, and character building, done by families, as well as social services provided by friends and relatives are extremely important. As more and more people start working in order to create wealth which is measured by the GDP, there is dramatic reduction in the non-market transactions which produce wealth, as well as in the informal economy. It is not clear whether there is a gain or a loss from this process. In particular, human capital adds enormously to productive capacities, so that it is an essential aspect of material wealth. In fact, according to World Bank report on the wealth of nations, this part is more important than the natural resources, which used to be far more significant in earlier times.

An external critique of the idea reject the idea that only markets produce wealth. It also rejects the idea that the market price is a good measure of the social value of the product. A lot of goods produced on the market are luxuries, wasteful, or useless products, which actually reduce wealth. Similarly, human capabilities are extraordinary and unique, and cannot be priced in the market. For the purposes of this article, it is sufficient to highlight that choosing market goods as the only factor to be counted as wealth, and choosing market prices as the measure of wealth, introduces market-values, substantially in conflict with traditional values, into the measure. At the same time, an appearance of objectivity is created by the numbers.

(to be continued)