Hunt for a new yardstick is on to replace GDP

GROSS DOMESTIC PRODUCT (GDP) is so twentieth century.

The measure has risen from humble beginnings during the Great Depression to be an essential gauge for governments and central banks the world over. Long-term investors allocate capital based on its findings; traders buy and sell stocks, bonds, currencies and commodities in the blink of an eye after readings flash on their screens. One such closely-watched report comes this Friday, when the US releases its revised estimate of second-quarter GDP.

Problem is — whether compiled by production, income or expenditure approaches — GDP is increasingly struggling to keep up with the pace of economic change.

In an age where $10 can buy one compact disc or a month of unlimited music streaming, it’s getting tougher to put a price on economic output. And as an aggregate measure that ignores distribution effects, GDP has masked rising inequalities that helped fuel antiestablishment politicians like Donald Trump or the backlash that contributed to “Brexit.”

So as governments in the rich world and emerging markets alike struggle to reproduce the growth rates and productivity leaps of previous decades, a more urgent search is under way to make the economic yardstick fit for purpose.

“GDP is easy to criticize but rather difficult to replace,” said Paul Sheard, chief economist at S&P Global in New York. “If governments are managing the economy based on this metric, then there’s merit to saying we should take a broader measure.” —