Why should we be glad when GDP goes up? GDP and employment are not necessarily r

Question

Why should we be glad when GDP goes up?

GDP and employment are not necessarily related. In fact, recently, we have had things called "jobless recoveries" where GDP goes up but employment does not.

The reason this can happen is that GDP is the value of all final goods and services produced in a country in a given period. If GDP goes up, the value of these things has gone up. But that can happen without more jobs being created.

For example, imagine an economy that has very little in the way of machines. If more machines are invented, GDP will go up as things can be produced more quickly. At the same time, employment may well go down because people will be thrown out of work by the machines.

So -- it's defined as economic growth because the economy is making more things (in dollar value). But that does not have to mean that employment goes up.

Explanation / Answer

An increase in GDP is good only in the sense that when money is spent, someone gets it, and that someone is usually happy about it. Whether it is good in the larger, societal sense depends on who spent it, who got it, what it bought, and what parts of the transaction were not accounted for. Economists are well aware of the inadequacy of GDP as a measure of welfare; they point it out in every macroeconomics course. But many economists, like many Presidents, forget the caveats and turn into cheerleaders, urging the GDP up, helping to reinforce the national illusion that a bigger economy is a better one.

The problem with that illusion is that it has come to dominate economic policy. We assume no changes are needed when GDP growth is high; we call on extreme measures when it is low. With GDP as our only powerful indicator, we are in danger of producing GDP instead of what we really want –health, education, security, a clean environment, jobs with dignity. Surely those goals are more important than just to keep on swelling.

When we hear that the GDP has grown, instead of cheering, we should ask exactly what has grown, for whom, at what cost, and at whose expense. Even better, we should work to develop indicators of national progress that reflect more accurately our real values and our real welfare.

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