Measure for measure

"for with the same measure that ye mete withal, it shall be measured to you again"

Economic growth is defined as the rate of increase of output over a set period of time. In the EU at least, following the widespread adoption of the European System of Accounts (ESA 95)—which the UK did in 1998, for example—the standard measure of economic development is gross domestic product (GDP) at constant market prices.

GDP measures the value of final goods and services produced in the domestic economy in a given period of time, usually one year; it includes indirect taxes, net of any product subsidies (this explains the “market prices” bit).

By stripping out from the money value of current production—or nominal GDP—any changes in the average price level in the economy between one year and the next, we are able to derive real or volume data. One method for doing this is to value the output of a later year using the prices prevalent in the earlier or base year. By comparing the change in the level of real GDP between periods, we are able to calculate real rate of change of GDP per year (this explains the “constant” bit). Other measures of output, less common nowadays, include gross national product (GNP), which takes into account the net flow of resources into or out of the economy, and national income (net national product, NNP), which includes depreciation.

Typical conceptual criticisms of GDP as a measure of economic growth are that it fails to take into account what is not bought or sold—valuable non-market services such as housework, for example. It also fails to encompass the benefits or costs associated with the growth process: the positive or negative economic utility value of leisure or pollution, for instance. Consequently, measures such as net economic welfare (NEW) have been proposed to overcome some of these problems, but have not tended to catch on—so far, at least. Additionally, any attempt to measure growth is compromised by the fact that the permanent innovation (which is intimately linked with economic growth) makes comparisons of the value of products across time difficult or, if a new product allows an activity that could not previously be undertaken, impossible.