At Oxford University,  many students regard attendance at lectures as optional.  So  teachers who fail to enlighten or entertain find themselves talking to empty rooms.  A malicious friend measured lecturing performance by computing the ratio of attendance at the beginning of a course to attendance at the end.  By far the highest score was earned by the hapless teacher of a first year course on national income accounting.

Few universities now even offer such a course.  They have responded – perhaps pandered – to student preferences, and the economics curriculum has moved on. Not necessarily in a good way; national income accounting remains central to economic statistics, and hence to economic policy, but is no longer well understood.  In a recent book, Diane Coyle has bravely attempted to make the subject once more accessible, and even interesting.

When economists talk about economic growth they are measuring  the change in Gross Domestic Product, or GDP .  Lay criticisms of GDP are often based on the indisputable observation that there is more to life than economics and material goods.  GDP omits work done in the home, mostly by women. GDP values expenditure on war and nursing care on the same basis.  GDP records the despoliation of the environment only by reference to the amount spent despoiling it, and then includes the amount spent to clean it up.  GDP does not tell us how happy we are, or how fulfilling are our lives.

These objections are valid, but largely beside the point.  GDP is a measure of how the productive performance of the economy..  How that productive potential is utilised is an important subject, but a different subject, and only partly an economic question.  It is a poor criticism of a thermometer that it does not  necessarily tell us how comfortable we feel.

Yet GDP is not a physical fact like temperature, but an artificial construction. Its measurement is conventional and subjective.  We should ask whether GDP is a good measure of what it is intended to measure.

GDP is gross, so  makes no allowance for depreciation. If there is a lot of short-lived investment – as in information technology – output is overstated if you include such expenditure as investment (which Americans are inclined to do) and understated if you write it off as incurred (which Europeans are inclined to do).  GDP is measured at constant prices, but what do you mean by the constant price of a computer or a piece of software? These different conventions matter a lot to the answers you reach.

GDP is domestic, so  that you measure what is produced within a country’s  boundaries, regardless of whom it is produced by, or for.  The combination of gross and domestic means that you include the total value of output , less operating costs incurred in that particular year. So resource producers look richer than they are:  the ‘yes’ campaign in Scotland has pointed out (correctly) that an appropriate attribution of oil revenues would make Scotland one of the wealthiest countries in the world (measured by GDP per head), but Scots would make a mistake if they thought that calculation showed independence would make them better off.

And national income accounting cannot handle the financial services sector.  Reported output of financial services increased dramatically during the 2008 financial crisis. This nonsensical result arises because the measurement of financial services output is strongly influenced by the margin between average bank lending and borrowing rates, which increased sharply.  When someone  confidently quotes the contribution of financial services to national income, you can be perfectly sure that they have no understanding of the intricacies of FISIM (financial services indirectly measured).  Only a few people in the depths of national statistics offices do.  This problem casts doubt on the validity of reported growth rates both before and after the crisis.

It once puzzled me that many economists in the financial sector forecast and discussed GDP without knowing what it was.  But the job of market pundits is not to forecast GDP, but  to forecast what the statistics office will announce is  GDP , and that is not at all the same exercise. 

Yet reality eventually breaks through. In  Ireland, almost all the issues I have describe  came together  to make the country appear, from its GDP statistics, better off than it was.  The resulting hubris left the country worse off than it need have been.