Economists have long argued that the gross domestic product has many flaws as a measure of well-being and policy success. Yet there’s a good reason it’s still being used: There’s a certain magic to it, despite its science being somewhat iffy. The National Bureau of Economic Research published a paper by Harvard economist Martin Feldstein detailing an argument he has been making for years—that GDP calculations underestimate actual growth and productivity. This optimistic argument is based on the difficulty of measuring changes in the quality of products and services, and therefore of life. Feldstein points out, for example, that official measurements, for the most part, only catch quality improvements if a product or service requires more expensive inputs: “If it doesn’t cost more to produce a product or service this year than it did last year, there has been no improvement.” Nobel laureate Joseph Stiglitz has long held the opposite view—that the GDP as measured today may overestimate well-being. For example, it counts any increase in government spending as positive, even though these increases may be inefficient or even counterproductive. Another analysis by International Monetary Fund (IMF) economist Marshall Reinsdorf found that their unmeasured effect on productivity could only be small. All the back and forth about how GDP is calculated is only possible because despite all the flaws, the measure somehow ends up feeling right. The distortions often end up cancelling themselves out. As Federal Reserve chair Janet Yellen recently pointed out, GDP is “a pretty noisy indicator” at best. Yet it remains extremely useful as a reference.

(Live Mint)