The Labour-NZ First coalition has earmarked $1 billion per annum for regional development. Strong business cases will be needed by local authorities vying for a slice of these funds. Each initiative will need to be underpinned by robust data that captures both social and economic outcomes in your area.
Don't overuse GDP in your business cases
Gross Domestic Product (GDP) is often misused as a headline measure of the well-being of people in New Zealand and around the globe, even though such conclusions go beyond what GDP was originally designed for. Put simply, GDP is merely a measure of an economy’s capacity to produce and isn’t a good way of grading end outcomes for our society as a whole or how individuals are faring.
As a result, decision makers should refrain from an overreliance on this single summary statistic and instead always focus on a wider panel of indicators for monitoring their economy and making policy decisions.
This conclusion is particularly applicable in the New Zealand context, where a renewed focus on regional economic development has meant that significant emphasis is being put on understanding differences in economic well-being between our regions.
What is GDP anyway?
Before taking a look at the range of indicators that regions should ensure are part of their monitoring frameworks, let’s take a more detailed look at where GDP came from and what its limitations are.
The modern concept of GDP was a by-product of the Great Depression, when people wanted a yardstick for valuing how much an economy could produce.
Put in slightly more formal terms, GDP was designed to quantify the value added at each stage of production across all final goods and services produced within a geographical area over a fixed period of time (usually a quarter or a year).
Given that these final goods and services, that make up the production-based definition of GDP, can be sold or traded, GDP is often also thought of as an income flow that is able to fund consumption and investment.
It is from this logic that some people then make the heroic assumption that GDP can be used as a proxy of well-being in a region, presumably on the basis that a higher level of consumption indicates more people satisfying their lifestyle demands.
At face value, this logic may make sense, but if we back up a couple of steps, it’s not hard to unpick some shortcomings in this approach.
The limitations of GDP
There are many limitations of using GDP as a complete measure of understanding people’s well-being, but let’s take a quick look at a few of them.
The first key limitation of GDP is that it only measures market transactions. GDP does not include non-market transactions (like when you dogsit for your neighbour), and it does not count the benefit of leisure (because simple pleasures like enjoying relaxing in front of the fire are not a market transaction). In a similar vein, factors such as how content people are feeling and their physical state of health can also not be captured using market transactions.
Another limitation of GDP is that it only considers a one-time flow of activity over a fixed time period, and does not take a broader look at the underlying wealth and resources at an area’s disposal. Surely any assessment of how well off an area is must look at the land, capital, labour, and other accumulations of resources that can be used to generate future economic activity and provide for the next generation.
GDP also does not distinguish between how the activity has been funded and where productive capacity is being targeted. This matters as failing to consider debt financing and what it is being used to produce, invest in, or consume is asking for trouble. If you have any doubt, consider all the money Greece borrowed for frivolous consumption and where that got them.
Finally, GDP is a highly conceptual measure that is prone to revisions as methodologies are improved or new types of input data become available. As a result, it is wise to also consider variables that can be more tangible assessed against outcomes that are less frequently revised.
Considering well-being in New Zealand’s regions
Despite the flaws identified above, GDP is still asked to inform policy decisions on a range of issues.
The appeal of GDP for policy makers is its simplicity as a summary statistic that can instantly give people a feel for how an economy is going.
Using GDP as one performance metric is not a problem persay, but things do get pretty dicey when it is used as a key indicator in more complex policy decisions, involving well-being differences between people and regions.
At Infometrics, we work hard to ensure that our regional web-based infrastructure, annual economic, and quarterly monitoring services deliver a broad range of insights in an easily digestible manner.
Our variables span a wide range of topics to a rich level of industry detail, including: GDP, employment, skills, occupations, businesses, incomes, housing and rental affordability, beneficiary numbers, migration, infrastructure investment, non-residential and residential building, vehicle registrations, retail spending and more.
Variables we publish can always be broken down to a territorial authority level of detail and are updateable.
Examples of how easy it can be to have a range of well sorted regional data is best shown by some of the infographics that can be downloaded from Infometrics’ web-based products:
- Here is an infographic decomposing Auckland’s economy
- Here is another that benchmarks Marlborough’s economic performance against its peers.
- If infrastructure investment is what you are wanting to monitor, then this infographic takes a look at infrastructure investment by Invercargill City Council relative to its peers.
The consistency of our datasets mean that regional decision makers can be confident that they have the tools on hand to monitor outcomes, particularly those affecting the future ability of their area to produce and the well-being of individuals within it.
- Regional economic development requires appropriate regional economic data for monitoring purposes and making evidence-based decisions
- GDP has limitations and should only be used for getting a headline summary of economic activity
- To understand well-being and performance more generally a panel of other indicators must be used
- Indicators must cover a range of labour market, standard of living, and investment metrics
- All indicators must be able to be updated and benchmarked against peers in other regions.
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