Unit 4: The problem with GDP & living standards.

Here’s a great topic for an economics debate. National income is still lower than before the financial crash. We have a ‘cost of living crisis’. Yet it’s possible to argue that life is better now than it was in 2005. How can that point be made without being laughed out of the room?

Allister Heath has a go at communicating this argument in The Telegraph. It’s fair to say it generates a scathing set of comments, and although some are a bit wide of the mark, he makes some solid points:

The first point is technological. A decade ago, many of the technological possibilities we take for granted today didn't exist. There were no real smartphones, no tablets, no apps, no streaming entertainment and e-commerce was far less sophisticated. Choice and connectivity were far less developed, and consumers had far less information at their fingertips. Some medicines and treatments that exist today were unavailable, one reason why life expectancy was lower.

• See if you can prepare a counter argument(s) before you read the article, in which the author tries to address the obvious evaluation points you might make in response (i.e "however..." or "it depends....") 
• Heath believes that the UK’s 6% or so national pay cut to date remains a price worth paying for having access to the convenience, goods, services and jobs delivered by the economy of 2014.

America has it worse. By some measures, real American median wages have fallen back to levels last seen a quarter of a century ago. But nobody would wish to go back to the economy of the 1980s. 

The median male in full-time work may have been better off on some statistical measure of their purchasing power – but the goods, services and medical knowledge of the time were horrendously backward compared with what we have become used to today.

That point underscores the inadequacy of using GDP as a measure of progress. It also points out that inflation measurement typically fails to capture price falls and quality improvements. 

You might have come across the old advert that proves you would have had to spend over $3000 to have access to the range of tools that you now have on your smartphone (I've seen another estimate of $2m!) And the old products usually weren't as good as your smartphone either.

A key point: The digital revolution is creating a lot of free value that is accruing to consumers, making them better off, but that isn't appearing anywhere in the official GDP, productivity or real wages statistics, despite the best efforts of our statisticians. 

In fact, new technologies are often having the opposite impact: in some cases, they are actually reducing reported output and thus purporting to show that we have become poorer, even though almost everybody is in fact being made better off. 

As far as the data are concerned, a collapse in telephony revenues actually reduces GDP: the fact that whole industries are being replaced by much smaller ones when measured in terms of the turnover and profits they generate is seen as a bad thing.

While official statisticians try as hard as they can to adjust for quality improvements, they simply cannot keep up, especially when entirely new products are introduced. 

The official figures also fail to account for time-saving: the explosion in online shopping has allowed millions to reallocate time to more useful activities.

Some good ways to evaluate these points: have a go!