gdpGross domestic product measures the total value of goods and services a society produces, but does not take into account the losses a society suffers. As such, GDP is an inadequate measure of a country’s economic development and progress. Has anyone done research along the lines of trying to adjust GDP for gross domestic depreciation and unexpected losses?
The most stark example in recent history is the earthquake in Japan. After this earthquake, most economists predicted that the GDP of Japan would rise due to increased government and private spending on rebuilding. However, in net national wealth terms, after all this spending Japan will only get back to exactly where it was before the earthquake. A change in “net domestic wealth” measure would clearly show that Japan is not better off after the earthquake.
GDP is a measure of total transaction value within an economy: in that regard, it’s analogous to a company’s turnover.
Changes to a country’s asset base are much harder to measure objectively, and analogous to asset appreciation / depreciation; extending the analogy, they might appear in a company’s accounts as an exceptional charge on the profit & loss account.
Understanding balance-sheet changes to a nation’s wealth are crucial, if we are to avoid the broken-window fallacy.
However, adjusting GDP isn’t the way to do this: it’s not necessary to have one single tool to try to do every job; we need several tools in our toolbox. GDP won’t tell us everything we need to know about an economy: we need information on employment, unemployment, money supply, demographics, and so on.
There is work ongoing on developing measures of a nation’s total asset base, and of incorporating the impact of externalities into that, to more usefully reflect the impact of economic activity: see, for example, the work on Natural Capital.
the other two answers are nice but perhaps not the most direct. Let me give it a try.
As I’m sure you already know, wealth is simply the accumulation of value over time (it’s a stock variable). Product on the other hand is the addition of value in a given period of time (it’s a flow variable). Accounting minutiae aside, therefore, “changes in net wealth” in a given period of time should be exactly the same thing as GDP net of depreciation in that period. The phenomenon you are speaking of (wealth loss due to the natural disaster) increases the depreciation of already existing assets.
So, yes, the appropriate measure to look at is GDP net of depreciation. Under normal circumstances, however (i.e., when depreciation is not affect by war, disasters, etc.) change in GDP equals change in net wealth. That is why GDP, being a simpler measure, can be used most of the time.
Incidentally, looking at wealth rather than GDP is much more important when one’s studying inequality rather than growth, since GDP is conceptually the wrong measure to use there.
Let’s start with some GDP metrics: GDP is measured in national accounts using two approaches, namely the expenditure and the produfct approach.
The expenditure approach to measure GDP consists of taking the total expenditure of households (and non-profit institutions serving households) and adding the total expenditures of the government (purchases of goods and services and the like). To this, you should add what is called “gross capital formation”, i.e. acquisitions and improvements of fixed assets (capital) less disposals of fixed assets.
GDP is the previous subtotal plus changes in inventories (these are goods previously produced and hence, generated revenue) and the value of net exports.
So if there is an exogenous shock on the economy (Japans’s earthquake) that affects its stock of capital (ridiculously high degree of radiation in the area around the reactor), and the government intervenes, it does so in order to sustain the level of capital stock. The GDP will measure the /flow/ of capital, i.e. the amount in a period of time.
The discussion in the wikipedia page is instructive.
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