The Economy, Growth and the GDP (very basic)
We are taught (by press and state) that the economy is critical to our wellbeing, that growth is necessary for happiness and prosperity, and that therefore the GDP must always go up.
The economy is everything related to money. If there's no price attached to it, it's left out; things like health and happiness, or even "externalities" such as clean ground water, clean air, or any riches we may find in the ground.
GDP (Gross Domestic Product) is the sum total of financial transactions in a country in a year: all money changing hands.
Economic Growth is defined by the increase over time of GDP.
1) What is most important to people cannot be expressed in money. What is important to business can.
2) Growth cannot be sustained in the long term, having only one earth. This simple mathematics, brought up time after time by economists, amazingly falls on deaf ears. (simple mathematics of growth: Al Bartlett (10 minute clips) or even simpler The Impossible Hamster (1 minute).
3) GDP, the measure by which we decide whether growth is present, and so determine whether the economy is doing well, and then decide what we need to do differently to make sure that this "all" gets better, has nothing to do with what is important to you and me. This is how Robert Kennedy expressed this in 1968. Examples on the right.
4) Growth is not necessary. Growth allows "economical" games to be played such as governments spending more than they have by borrowing. Because of growth they can pretend all is well and they can borrow more the next year, and can just about pay interest on the loan. This creates massive debt for future generations. You were born with some inherited national debt, but your kids are born with a much greater national debt. If it takes generations to build up that debt, it will take generations of thrifty behaviour to pay it off. Debt takes away future generations prosperity and freedom. Without growth borrowing could not continue and debt at least would not grow.
GDP expresses only money:
Example: you buy shoes for £100 and they last 20 years: that adds ~£5 to the average GDP over 20 years. However, if you buy shoes for £50, they fall apart in a year, you buy new ones, etc, you will be adding £50.- to average GDP. So bad shoes are good for the economy. And if those shoes increase a little bit in price each year, we've established growth! We still have bad shoes.
Example: financial institutions create GDP by making and selling derivatives, i.e. packaging something we already have differently, and then selling the packaging. Or just buying, selling, buying and selling the same thing over and over.