Off the Shelf

An Economic Gauge, Imperfect but Vital

By Fred Andrews

CreditCreditAlessandra Montalto/The New York Times

In “G.D.P.: A Brief but Affectionate History,” Diane Coyle, a British economist, conveys a sophisticated understanding of an economic standby, the quarterly measure of gross domestic product. A vital gauge of any nation’s prosperity, the G.D.P. has its strengths and its limitations, which are well explained in Dr. Coyle’s rich and engaging little book.

Ultimately, Dr. Coyle’s “affectionate history” offers two cheers for the G.D.P., which was designed for a simpler era of mass production, for counting widgets as they came off the line. The measure’s acolytes in Washington now struggle to adapt this all-important count to fit our Internet economy, where innovation is rampant and so many benefits are free.

Unlike temperature, which we measure with a good thermometer, nothing in nature corresponds to “gross domestic product.” It is a concept invented by learned experts to capture the overall economy’s performance as best we can. It includes what experts decide it should include, with notable omissions — some deliberate, some not.

Yet no one doubts that the G.D.P. is essential. Both public and private decision makers need some idea of how well the overall economy is doing. Small changes in G.D.P. make a big difference. At 4 percent growth a year, for example, the economy will double in 17 years; at 2 percent, it will take 35 years. A 1 percent decline is a national calamity; a 2.5 percent gain is something for politicians to crow about.

The most common definition of G.D.P. is consumer spending, plus investment spending, plus government spending, plus exports, minus imports. The count relies on timely surveys of transactions, compiled in the United States by the Commerce Department’s Bureau of Economic Analysis, with a cast of thousands.

In 2008, the United Nations published its System of National Accounts as the global standard for computing G.D.P. Those rules run 722 pages, with an additional 400 pages of commentary. Devilishly complex, the rules involve innumerable estimates and arbitrary decisions about what does and doesn’t fit. Only a handful of specialists fully understand the system, Dr. Coyle writes, and only a few dozen nations fully carry it out.

The Bureau of Economic Analysis listed G.D.P. as one of the greatest inventions of the 20th century. It was devised during the Great Depression when the New Deal of President Franklin D. Roosevelt was desperate for a gauge of how the failing economy was faring. That early version proved invaluable during World War II, when the nation needed to decide how to apportion its scarce resources between wartime and civilian priorities.

That new technique reflected the economy of the time, a manufacturing economy much different from today’s. The G.D.P. is a measure best fitted to mass production of hardgoods. Not for nothing is it called the gross domestic product. It fares less well in gauging the value of services, which have swollen to dominate today’s economy. And lacking market prices as a guide, it does even worse in measuring the output of government, now a driver of the economy.

A major omission is the work we do for ourselves: cooking, cleaning, painting a room, taking care of children or an aging relative. Pay a gardener to mow your lawn, and that’s part of the G.D.P.; do it yourself, and it’s not. If all such tasks were included, and priced at the going wage, their contribution to the G.D.P. would be tremendous.

Nor does G.D.P. count the underground economy, conducted out of sight of regulators and tax collectors, even though this unofficial sector provides many jobs and is often highly entrepreneurial. Estimates are that in some countries the “informal” economy amounts to a quarter of total output, and considerably more in the third world. (In the United States, the estimate is 7 percent.)

From the very first, arguments have raged over whether the G.D.P. measures the right thing. Shouldn’t we count the increase in national well-being as opposed to national production? Some economists have argued that items they consider negative, like spending on armaments of war, advertising huckstering and stock market speculation, have no place in a measure of national betterment.

The G.D.P. finesses those imponderables. If a transaction is priced in dollars, it goes into G.D.P., with no ethical debate over its contribution to human welfare. The G.D.P. accommodates both what we spend on producing electricity by burning dirty coal and what we spend on pollution abatement to keep the air clean.

Dr. Coyle concludes that while imperfect, the G.D.P. is good enough as a measure of how fast the economy is growing and better than any alternative. It is closely correlated with things that do contribute to happiness. (Nobody is happy in a recession.)

“We should not be in a rush to ditch G.D.P.,” Dr. Coyle writes. “Yet it is a measure of the economy best suited to an earlier era.”

For one thing, it fails to count the value of the staggering growth in consumer choice. Where once we had three television networks, we now have 1,000 channels; greater choice equals greater freedom, she declares. It does poorly in measuring the Internet economy, in which so many benefits — like Google searches — are offered free. It badly lags behind the headlong pace of innovation and creativity. It struggles with the true value of a host of products or services that didn’t exist before. To the degree that it misses those new benefits to consumers, it understates the pace of economic growth.

Most seriously, she writes, G.D.P. tells us nothing about whether we are eating our seed corn. Does today’s growth come at the expense of tomorrow’s? Are we consuming our natural — and human — resources without replacing them? She urges that we add a regular, official indicator of “sustainability.”

Be warned, though, that Dr. Coyle’s little book is a short history, not a primer. It is not baby steps. Though her writing is often a marvel of clarity, at times she takes on topics that are best understood only if you already know what she’s talking about. Sometimes the book takes too many shortcuts.

The best example is her conviction that current measures of G.D.P. greatly exaggerate the importance of financial services to overall economic output. Perversely, in the final quarter of 2008, Britain’s banking industry showed its fastest growth on record, almost matching manufacturing in size, just as the money markets all but froze.

“This is absurd,” she writes. “What on earth was going on with the statistics?”

What was going on, it appears, was that a new measure of banking’s output tied a bank’s contribution to G.D.P. to the degree of risk the bank was taking — an ill-timed idea, if ever there was one. That, at least, is the best I can extract from the six abstruse pages spelling out the detail. They include a cryptic reference to counting financial services as “the negative output of an imaginary segment of the economy.”

Huh? Run that one by me again?

A version of this article appears in print on , on Page BU6 of the New York edition with the headline: An Economic Gauge, Imperfect but Vital. Order Reprints | Today’s Paper | Subscribe