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There are very few numbers that can instil excitement and depression quite like Gross
Domestic Product (GDP). Government policies are shaped, budgets are set, debt
ceilings are determined and, at office watering holes, this mystical number is analysed
by economists and laymen alike. Our very sense of wellbeing is directly influenced
by the publication of the number. While most of us understand GDP as a measure
of economic health, not many of us who use GDP have an appreciation of what the
measure actually counts and what it omits in reflecting overall economic health.

So, here is a piece of GDP trivia that I’m sure might have escaped you. In 2008, Bermuda
eclipsed Luxembourg to record the second highest GDP per capita ($93 000). It was
only the small, oil-rich state of Qatar that recoded a higher GDP per head. Today,
Bermuda’s GDP per capita is 70% more than that of the United States. I don’t know
about you, but all that comes to my mind when I think of Bermuda are bronze bodies
meandering across the even bronzier beaches – certainly not the global model of
industrialisation and productive economic growth.

This begs, what I think, a set of rather important questions about GDP, such as: what
does it measure, how is it measured, what can it be used for, and what does it say
about our economic well-being?

Origins of GDP
The concept of GDP was first developed by William Petty to defend landlords against
unfair and unsustainable taxation during the Dutch-English wars of the mid-1600s. His
calculation entailed a very crude method to determine the total production of goods
and services.

It was not until 1933 that Kuznets, at the request of the US congress, produce a method PROVINCIAL OUTLOOK NATIONAL OUTLOOK GLOBAL OUTLOOK GAP HOUSING INVESTOR NARRATIVE SPOT THE OPPORTUNITY PORTFOLIO INSIGHTS KHULISA NEWSLETTER ELECTRIC VEHICLES ENERGY SECURITY LOOKING AT GDP
sufficiently sophisticated to calculate GDP in an industrial economy. The concept of
GDP was further promoted by John Maynard Keynes, who is generally regarded as the
father of macroeconomics.

I am always taken aback by the fact that while concepts of trade, clear distinctions
between labour and capital classes, factors of production and money are all hundreds
if not thousands of years old, but the study of macroeconomics as we know it today is
barely 70 years old. Perhaps it was because central to the study of macroeconomics
is macro-indicators such as employment levels, inflation and, of course, GDP, none of
which were available to the economist before the 20th century.

Accurately measuring macro-indicators such as GDP, employment and inflation as
frequently as four times a year, is a mammoth task. The accuracy of the estimation is
correlated to both cost and time. To improve the cost-benefit ratio of collecting and
presenting macroeconomic statistics timeously, a very small part of the economy is
surveyed and modelled. With any survey data, in inferring the characteristics of the
population from a survey, we accept a combination of sampling, measurement,
coverage and response errors.

To increase confidence in GDP, we do measure GDP in three different ways, by:
a) aggregating all spend in the economy (expenditure approach),
b) adding all earnings in the economy (income approach), or
c) adding all value added (production approach), that is the price of outputs less the
price of intermediate inputs.

QUARTERLY ECONOMIC BULLETIN 2016 9