Gross Domestic Product.
This is a favorite of economists. The financial media picks up on it. Politicians tout the results (when it benefits them). Analysts conclude whether the economy is growing or contracting based upon the numbers.
There is one major problem: it is no longer a valid metric.
In an era where technology is becoming a larger slice of the pie, we are now at the point where many of our common metrics are ready for the graveyard. GDP is one of them.
The Limitation of GDP (As A Metric)
One of the industries I like to point to is music. I am old enough to remember when we use to purchase our music on physical items. There were records, 8 track tapes (for a few minutes), cassettes, and finally CDs.
In the 1980s, the cost was $8-$13, depending upon whether it was a cassette tape or CD. This was real money that people spent.
Today, it seems like an absurd concept. What does this, however, has to do with GDP?
If we look at the music industry, the numbers for the sales of record music, which impacts GDP, see the numbers in the 2020s matching that of the late 1990s. That means we are basically talking about flat numbers for two decades.
That said, look at the amount of music we have access to. Whether it is through YouTube, Spotify, Pandora or Apple music, we can access millions of songs for free. Therefore, unlike the 1980s where people were limited to a few dozen albums, we can listen to thousands if we desire.
Where is this realized? If we used the same basis, purchase, for what we have access to, people would have spent tens of thousands of dollars (each). Consider what impact that would have on GDP?
Another favorite of mine is communications. When was the last time you paid a long distance bill?
These might seem trivial but there are dozens of examples where people spent money. Entire industries were wiped out, removing those numbers from the equation. Certainly, this was often caused by technology replacing it with something better. It must be remembered the replacement often encompasses more.
For example, long distance phone service was voice. Our communication systems these days are multimodal. It is also basically free. Hence, not only is the cost removed but we also see the features (experience) enhanced.
The Deflationary Impact of Technology
Oil is a commodity that is central to the global economy. Few would consider even trying ti dispute this.
Here is a chart regarding the price of that commodity over the last 25 years from the Federal Reserve database.
Notice how oil prices are at their 2005 levels. Naturally, we see the fluctuations over the years as the asset is very volatile. In spite of the ups and downs, we see how things are trending down.
As it pertains to GDP, there is an increase. The price is down but we are using more oil. According to Grok, in 2000 we consumed 76.5 million barrels of oil per day. That number jumped to 103 million in 2024.
While it is captured in GDP, the net impact is not felt. We have more oil for less money, mostly due to the technology of horizontal drilling. The effects of the extra oil consumption if felt in many ways throughout the world.
At the same time, we have other sources of energy that went into operation. Thus, it we look at the total amount of power versus the contribution to GDP, it doesn't match. There is a lot that is missing.
We keep expanding this concept. So far we see it in photography, information, finance, and other aspects of life. When was the last time you bought a postage stamp, especially to remit checks (which have a cost) for bills?
What is next? Automation is definitely on tap, making things such as the cost per mile driven to be affected. Robotics will also be employed, providing outputs in ways that people fail to realize. The GDP will capture the robot but what about the effects that are not monetized?
Here is where new metrics are required. What is the replacement? That is certainly a difficult question to answer.
The first step is realizing how flawed GDP, as a metric, is today. From there, perhaps we can develop other means of tracking.