GDP Revisited: Are Statistics Reliable Enough for Financial Decision Making?

Relying on statistics when making personal financial decisions can be a tricky and risky business. The word 'statistic' when looked at from a purely semantic perspective does not mean 'factual' and the sheer complexity of determining statistical validity leaves plenty of room for confusion.

If any statistic has no demonstrated validity to qualify it, it's as good as an unsorted statement in an academic journal and hasn't been substantiated to the reader. This alone should cause one to think twice even if those statistics are coming from a reliable source. 

Statistics are often based on samples which makes those measurements representative at best. Furthermore, how those samples are selected leaves lots of room to manipulate the statistical results before they're even measured. Similar to attorneys weeding out jury candidates least likely to agree with their legal arguments.

Let's take a look at the following bar graph from the BEA to see where there is room for confusion:

• No reference to statistical validity is given

• Graph represents percent change not dollar value

• GDP itself is measured in a 'specific' way

• Doesn't mention inclusion of Government spending

• 'Seasonal adjustments' not accounted for in graph

The following table excerpt, also from the Bureau of Economic Analysis points out GDP in 2005 dollars is lower meaning the intrinsic value of GDP is actually lower. Someone looking at the GDP bar graph might actually assume it represents actual GDP.

Quarterly
(Seasonally adjusted annual rates)
	GDP in billions of current dollars	GDP in billions of chained 2005 dollars
2005q4	12,915.6	12,748.7
2006q1	13,183.5	12,915.9
2006q2	13,347.8	12,962.5
2006q3	13,452.9	12,965.9
2006q4	13,611.5	13,060.7
2007q1	13,789.5	13,089.3
2007q2	14,008.2	13,194.1
2007q3	14,158.2	13,268.5
2007q4	14,291.3	13,363.5
2008q1	14,328.4	13,339.2
2008q2	14,471.8	13,359.0
2008q3	14,484.9	13,223.5
2008q4	14,191.2	12,993.7
2009q1	14,049.7	12,832.6
2009q2	14,034.5	12,810.0
2009q3	14,114.7	12,860.8
2009q4	14,277.3	13,019.0
2010q1	14,446.4	13,138.8
2010q2	14,578.7	13,194.9
2010q3	14,745.1	13,278.5
2010q4	14,871.4	13,380.7
2011q1	15,010.3	13,441.9

Even the accuracy of statistics can be measured in a number of ways. Perhaps even too many ways as the usefulness of anything becomes questionable if it has to be tested, retested and be the subject of a barrage of diagnostics before an assessment can be made about its accuracy. In actual dollars the percentage change from 2010 Q4 to 2011 Q1 is less than 1/2 a percent, 50 basis points or .005 percent which all mean the same thing. 

So how should one use statistics to make decisions in personal finance and what kind of decisions can be made with statistics? For starters subtracting government spending from deficit spending will yield a number of non-leveraged GDP which can be more realistic. Secondly, looking at just GDP may provide an overly generalized and depending on the graph, inaccurate economic performance metric. 

Why GDP can Decline with Improvements in Quality of Life

Quality of life decreases along with declines in Gross Domestic Product (GDP) due to an intrinsic correlation between the two. Consequently, GDP is the only measurement of progress needed. This article will expand upon the connection between GDP and quality of life in addition to illustrating why GDP is the more important of the measurements.

'Progress' is a relative term open to debate and depending on who one asks. However, if the concept of more is tied with progress, then more productivity as measured by Gross Domestic Product is not the only metric a society can attain increases in. More happiness, more health, more freedom, more rights etc. are all gains in life some might consider progress. 

A significant question of possibility emerges out of this divergent view of progress however. Specifically, can progress be sustained if other metrics of progress besides GDP and related measurements such as Job growth are not the only indicators of progress? In other words, can productivity continue grow side by side with other types of progress? After all, people might get lazy when they're happy so having more of other things considered progress might just be counterproductive to progress. This article will discuss other types of progress side by side with GDP in light of the above considerations.

Since Gross Domestic Product measures the total output of goods and services produced by a country, that measurement is a measurement of total material wealth produced for a given year as valued by currency prices for the cost of those goods and services. The first question one might ask is ,if the GDP were to decline, could other aspects of 'progress' continue to rise? For example, if there is less medical equipment, fewer doctors produced, less health care services etc. one can draw the connection progress in health care may also decline along with the decline in GDP if such GDP declines are comprised of declines in health related products and services. The result becomes less progress in this case, and may be further debilitated by declines in production related to other aspects of the economy.

To further illustrate, progress is linked to the economy and the economy is measured by GDP. While GDP is not the only measurement of an economy, it is a key indicator of the wealth available to a 'population'. The less wealth there is, the lower the standard of living becomes. Since standard of living is related to quality of life, a decline in GDP which is a measure of standard of living means there is likely to be a correlation between GDP and quality of life. So from this perspective, GDP is a measurement of quality of life in so far as the two are related. So why then does the question of quality of life indicators even arise? This is a good question.

The need for quality of life indicators can be thought of as a cry for help regarding disproportionate distribution of Gross Domestic Product. To illustrate, if everyone were to suddenly become rich, a great majority may find it simply unnecessary to work, or their productivity would decline in their lack of need to work. After a short while, inflation would rise, GDP would decline due to so many people being rich, and the quality of life would fall. Granted, some may still be motivated to work for love of labor, and other forms of gain such as social status, or even some kind of ethical conviction. However, the principles of human nature tell us, we are motivated by greed and that greed includes greed for a worry free life. That worry free life would end up leading to a decline in the overall quality of life.

So how can this apparent paradox between GDP and quality of life be solved? That is another question for another day. For the time being, one might realize quality of life is merely the call for more share of the GDP. If one is still not convinced of this relationship consider the notion of quality of life further. Love, comfort, harmony, amenities, entertainment, luxury, services etc. can't all be bought with money but certainly can be facilitated by wealth. 

Since wealth is measured by GDP at the macro-economic level, the correlation between the two is theoretically sound. As we have seen, a micro-economic distribution of GDP that is spread more evenly, has a strong possibility of leading to a decline in GDP and thus quality of life. Human nature is at the bottom of issue but who has the time to worry about that when everyone is chasing the GDP?