The GDP is BS and I’ll Tell You Why

Why GDP Is a Mirage, Not a Mirror: The Economic Illusion We Need to Shatter

If you aim to keep abreast of economic matters, you're bound to encounter numerous charts comparing the Gross Domestic Product (GDP) across countries. These charts often showcase stark disparities, revealing a 'wealthy global north' and a 'struggling global south,' and maybe you might feel the urge to measure your country's economic standing through its GDP. Some may even consider GDP as a baseline indicator for wealth and opportunities when contemplating investment or migration. However, this article argues that it is not only an insufficient metric but often a deceptive one. GDP fails to capture the economic reality of everyday people, giving a distorted view of affluence, wealth, and income distribution. Read on to discover the pitfalls to avoid when evaluating a country's economic conditions.

Disclaimer: GDP ≠ GDP

It's important to note that GDP can be calculated in various ways. One common approach is to tally the total expenditures by consumers, businesses, and governments within a country. Another is to use an income-based methodology. Furthermore, GDP can be classified into two types: 'nominal' and 'real.' Nominal GDP quantifies the value of all finished goods and services within a country's borders using current market prices. Real GDP, on the other hand, is adjusted for changes in price or inflation levels.

For the purposes of this article, the focus will be on income-based GDP per capita.

GDP Ignores Income Distribution

Let's begin with an obvious point: GDP per capita provides an average income per citizen, but it leaves out crucial information about how that income is distributed within a society. Take this hypothetical example: if one individual earns $800,000 per year while nine others earn nothing, the GDP would still average out to $80,000. This means a society could have a deeply impoverished majority and a small, ultra-rich minority, yet still report a high GDP.

Additionally, fluctuations in GDP do not necessarily correspond with changes in individual earnings. For instance, the United States experienced an 8.8% GDP increase from 2021 to 2022. Despite this economic uptick, real average hourly earnings declined by 3.6% over the same period.

GDP Ignores Costs of Living

$100 won't nearly stretch as much Zurich as it would in Lima — and what affords you a few bags of snacks in Canada's northern territories could fund a sumptuous family dinner in many parts of Central America. Consequently, when examining GDP per capita or the average income in any given region, it's essential to consider the local cost of living. What might barely constitute a living wage in one locale could be seen as ample income in another.

Another overlooked variable in GDP calculations is inflation, a factor that significantly impacts living costs. Inflation itself can be a contentious indicator, given that no universal formula exists for its calculation, and countries may determine their rates differently. Often, the reported numbers underrepresent the actual increase in the cost of living experienced by the populace. Take Germany in 2022 as an example: the government announced an inflation rate of 7.9%, yet prices for basic utilities like household natural gas surged by 46.2%, the costs for many food products rose by 15-20%, and rents soared in many cities. Intriguingly, Germany's inflation calculations also account for discretionary spending on items and services like restaurant meals, hotel stays, cigarettes, beer, garden furniture, and even tailor services. Therefore, for those who allocate most or all their income to essential expenditures, the real inflation rate can be markedly higher than official statistics suggest.

GDP Ignores the Tax Burden

The term 'gross' in GDP already implies that it doesn't factor in the responsibilities of taxes and duties you'll encounter in different jurisdictions—and the variation can be huge. Taxes, after all, determine the amount of your income that you get to take home. For instance, earning €100,000 annually in Cyprus would leave you with about €70,000 post-tax, while the same income in Belgium would shrink to a mere €50,000. In the U.S., tax structures vary widely by state, with some imposing a graduated or flat-rate income tax, and others foregoing income tax altogether.

When considering GDP per capita, the tax burden in a specific country or region should not be overlooked. But exercise caution: governments often camouflage taxes behind euphemisms or intricate tax structures. Take Austria, which touts a progressive income tax system ranging from 0% to 55%, depending on yearly earnings. What advocates often omit is the added layer of mandatory social security contributions, which can range from 27.8% to 39.15% of one's income, determined not by income level but by job type. Thus, while a 30% average income tax might sound reasonable at first glance, the overall tax burden, including social security, is substantially higher and has a significant impact on net income.

GDP Ignores Labor Conditions

The GDP per capita fails to account for the amount of labor required to earn an income, a factor that varies widely across countries. In a twist of irony, people who work the hardest often seem to reap the least benefits. For example, full-time workers in many developed nations might only spend about 35 hours a week in the office, while their counterparts in emerging economies often clock in 60-hour weeks as a norm.

The treatment of holidays and paid vacation also varies significantly from country to country, adding another layer of complexity that GDP per capita fails to capture. In the United States, workers can generally expect 11 federal holidays and 11 paid vacation days annually. Meanwhile, workers in Spain enjoy 14 public holidays along with a minimum of 30 paid vacation days, nearly tripling the total time off compared to their American peers. This stark discrepancy in work hours and vacation time underscores how GDP per capita can paint a deceptively rosy picture of a country's well-being, omitting the toll that long work weeks and limited time off can take on an individual's quality of life.

GDP Ignores Poverty

A high GDP does not automatically equate to low levels of poverty within a country. In fact, some nations with impressive GDP figures, like the United States, grapple with significant poverty issues. For instance, more than 500,000 Americans were homeless in 2022, and about 18% of the population lived below the poverty line. In contrast, countries such as Kazakhstan and Thailand, which have substantially lower GDPs compared to the United States, report almost no homelessness and have poverty rates of only 5-6%.

Therefore, a high GDP is not a reliable indicator of overall prosperity or a universally high standard of living. It can, in fact, mask deep-seated economic disparities, a high cost of living, and serious challenges for those who live around or below the poverty line.

GDP Ignores Sustainability and the Shadow Economy

As the urgency of climate change grows, sustainability has become a crucial concern for many. However, a high GDP doesn't necessarily indicate a sustainable economy. In fact, it often appears to incentivize wasteful consumerism. For instance, the trade of used goods is not included in nominal GDP calculations, effectively rewarding disposable culture. Additionally, GDP metrics do not take into account sustainable resource management or eco-friendly business practices.

Furthermore, GDP fails to capture the shadow or informal economy, which can be a significant portion of a country's economic activity. In nations burdened by heavy regulation and taxes, the shadow economy can become an essential component of the overall economic landscape. This is particularly true when certain goods and services become unaffordable unless acquired 'under the table.' Estimates suggest that the shadow economy could account for anywhere between 10% and 50% of the total economy in most countries.

Conclusion: If You're Searching for Economic Insights, Don't Rely on GDP

The bottom line is clear: if you're looking to understand the economic landscape of a specific area, GDP should not be your go-to metric. It's essentially a rough estimate based on what governments can measure and leaves out numerous crucial variables. In that sense, it becomes a somewhat unreliable indicator for both evaluating and comparing economies.

Certainly, there are other metrics, like the Human Development Index and the Inclusive Wealth Index, which aim to give a more rounded picture. However, each of these has its own set of limitations and critiques—topics worthy of an entirely separate article. If you're seeking to understand the real economic conditions in a particular area, I recommend analyzing a range of factors. These should include cost of living, income distribution, tax burdens, inflation affecting essential goods and services, labor conditions, poverty rates, sustainability, and the prevalence of an informal economy. Only by integrating all these factors can we begin to understand the true level of wealth and the economic realities in a society.

---