The questions we need to ask are: What do we really want to know and why? What purposes were we pursuing when we sought to measure economic activity? Is measuring GDP helping to achieve those purposes? Are those purposes still our priorities? If not, what should be? What different institutions might we invent to achieve our purposes as we NOW understand them?
Some possible reasons to measure GDP:
1. To provide an indicator of the economy’s capacity to produce the goods needed to win a war (including necessary consumer goods as well as arms).
2. To provide a measure of the economy’s ability to provide for consumer welfare.
3. To compare productivity across countries and over time.
4. To indicate the extent to which an economy is in a recession.
5. To measure economic activity at market prices.
I think that (1) would have been most useful around the time of World War II, when the outcome was very much affected by this sort of productive capacity. It probably is less useful today.
I think that (2) is a very interesting measure. But (a) why not just focus on goods and services consumed? (b) you need to think a lot harder about how to measure consumers’ surplus (c) you have to think a lot harder about how to measure the consumption services from durable goods, particularly housing (d) you need to think a lot harder about what Thoma refers to as “bads,” like pollution.
I think that (3) is useful, but stop pretending that you can be accurate to at least two significant figures. When someone says that productivity growth changed from X over a five-year period to Y over the subsequent five-year period, their view of the signal-to-noise ratio in the data is much more optimistic than mine.
I think that (4) relies too much on the AS-AD framework, to which I do not subscribe.
I think that (5) is useful, but our current approach is wrong. Most government services are not sold at market prices, and so I would exclude them from this sort of measure.