GDP is a statistic that is heavily followed in the financial world. It is something that is deemed worthy of showing how the economy is doing.
Gross Domestic Product might have been valid in the plant, capital, labor era. However, in this age, things completely changed.
To simplify things, GDP basically registers a countries output. Thus, when they say that GDP rose 2% over a particular year, that means the country produced 2% more than it did before.
There are other sub factors such as Real GDP which we won't get into in this article.
If we want to break this down even further, we can look at a particular industry. Thus, for example, if an industry grows by 5%, it is believed to add to the overall GDP. The flip side is an industry that contracts, let's say 3%, is said to take away from GDP.
Unfortunately, in the informational age, this is not accurate. Over the last couple decades, we saw a number of industries where digitization make a huge impact.
Look at this chart. The effects on GDP are rather obvious throughout the entire time covered.
Under this scenario, the music industry started to decline in terms of adding to GDP. However, is this accurate?
If we look at another chart, we see a different story.
As we can see streaming services exploded. Obviously, we have a differing in time period covered by the idea shows through. Streaming adds less to GDP as compared to the old way of distributing music. The reason: prices are less expensive.
Would anyone say we are producing less music than before? The answer is certainly not.
Look at some of these industries:
- Newspapers
- Video Rental
- Classified Ads
- Encyclopedias
- Travel Agents
- Road Maps
- GPS
- Cameras and Film
- Long Distance Phone Service
All of these previous added to GDP. The challenge is that technology forced the value to either zero or near zero. Thus, the replacement technologies are contributing a fraction to GDP what was there before.
Of course, from a societal perspective, we are much better off. Much of this list is either in or accessible using a smartphone.
This point was driven home one day when I was out for a walk. An Amazon truck came by and I seemed to follow the same path. In a one block area, the truck made 5 deliveries.
Consider if all 5 of these people had to go out to the store to get what they ordered. That would be 5 vehicles using gasoline. The same 5 vehicles would have experienced wear and tear, shortening the life of the car. Maintenance would come that much sooner since added miles were on the car. Stores use energy, employ workers, pay rent on retail space.
Odds are these 5 people would have gone to different stores to fulfill what Amazon delivered.
When we add all that up, compared to Amazon, the contribution to GDP is much less. Now multiply that over tens of millions of online orders.
Just think of all the industries that are going the same way. What about the copiers/printer/office paper industries? With people storing and sending information electronically, it is near zero cost. No need to incur those "ancient" expenses.
Unfortunately, GDP is one of those stats that does not tell the story. A country that is rapidly moving into the digital world could actually see a negative GDP yet be expanding like mad. Consider what will happen when automobiles becomes transportation-as-a-service.
The impacts will be profound.
And the GDP numbers will be adversely affected leading many to conclude things are contracting.
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