Does Material Progress Matter?
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The headline might read that the GDP grew 2.1 percent this quarter, but does this really matter? Few among us stop to think about what GDP is, what it actually measures, or what it means for them when it grows or shrinks. For the cynical among us, the growth of GDP represents the expansion of human greed and environmental destruction. But it turns out that GDP is a reasonably good indicator of material progress and material progress is anything but greedy or destructive.
A Brief History of GDP
Gross Domestic Product, or GDP, is a metric that was born out of a World War 2 need to determine the total productive capacity of an economy to support a war effort. The metric was never intended to be a measure of well-being for the inhabitants of that economy. Nonetheless, its cousin, GDP per capita, or the GDP divided by the total population, has become commonly used to measure well-being regardless.
There are three ways to measure Gross Domestic Product, you can measure the total output of the economy, the total expenditures within the economy, or all of the incomes. For most of us, the measurement of total expenditure is the most familiar and understandable. This measurement roughly follows the formula below:
GDP = Consumer Spending + Investment Spending + Government Spending + (Exports-Imports)
In practice, this extremely simple calculation is fraught with fuzziness and room for error. Adding up the sales of tangible goods, for example, is relatively easy, but intangible services are notoriously difficult to calculate. This fact is salient because economies are gradually dematerializing, with an ever greater share of the productive capacity devoted to services. This makes calculations of growth increasingly difficult as economies develop and mature.
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