Real Real GDP
By Bryan Caplan
Gross Domestic Product is staunchly atheoretical. If someone spends money on X, X is GDP – even if “someone” is Congress, and X=”a bridge to nowhere.”
There are exceptions; most notably, the stats supposedly exclude “intermediate goods” to avoid double counting. I say “supposedly” because the list of “intermediate goods” is so inconsistent. Insofar as police protection and the military protect firms from harm, aren’t the police and military intermediate goods? But despite these tensions, a big part of the philosophy of GDP is to eschew philosophical arguments about what’s “really productive.”
On reflection, though, the standard approach is anything but agnostic. Official stats tacitly make an extreme assumption: waste does not exist. Astrology counts, even though astrologers can’t predict the future. Every penny of health care counts – regardless of its efficacy. The whole defense budget counts – even if it’s provoking war rather than deterring it. Indeed, if two countries’ militaries mutually annihilate, both countries count the cost as a benefit.
Question: Suppose you had the chance to redefine the GDP formula – to create the real measure of real GDP. How precisely would you change the formula – and why? Your answer should contain the equation: real real GDP = something.
Extra credit: Create and share a graph that shows how your real real GDP measure compares to official real GDP over the last fifty years.