Globalization is one of the forces shaping current macroeconomic realities. It is the process of the elimination of the geopolitical barriers to trade and communication (Guttal 56). GDP is widely accepted as the macroeconomic indicator that shows changes in economic growth (Zatzman and Islam 27). It usually applies to specific countries. Economists use it to determine overall economic growth in specific regions. The challenge that globalisation poses to this measure is that it is making international trade more difficult to track and to measure. Therefore this paper will explore the relevance of GDP today in the context of globalisation. Is the impact of globalisation large enough to render GDP inadequate a measure of economic growth within geopolitical boundaries?
GDP is the economic measure that describes the performance of the economy of a country. The basic calculation of GDP relies on the assumption that it is possible to determine whether an economy has grown or shrunk by looking at the total value of goods and services produced by the country over a specified period (Zatzman and Islam 27). In other words, GDP measures the rate of wealth creation in a country. The analysis of the performance of the economy of a country every year gives an indication of whether the country’s economic performance grew or shrunk.
Economists use the income approach and the expenditure approach to measure GDP (Zatzman and Islam 32). The income approach measures a country’s income from local and international trade. Under this method, the county uses economic indicators that show the volume of trade between a country and its trading partners.
The expenditure approach measures the overall amount of money spent by the country to buy goods and services. The expectation of economists when calculating GDP based on expenditure is that by measuring what the citizens of a country spend on goods and services, they can deduce the amount of money they made that year.
The two approaches are effective ways of measuring the economic growth of a given country. However, the two approaches require adjustments to account for other realities in the macroeconomic environment of different countries. For instance, the expenditure approach of GDP calculation does not capture money made but not spent. Such income can go into savings, or into dormant accounts. On the other hand, calculating GDP using income fails to capture the value created, but not transferred. In addition to these weaknesses, both measures do not capture activities in the black market economy.
The emergence of the internet as a communication medium is the single most important factor in the process of globalisation. Globalisation started many centuries ago when certain states invaded others, or formed business partnerships. However, the current impact of global activities is incomparable to any other time in history, both in political, social, and economic terms. The internet makes it possible for people to communicate in real time from any location on earth. While it is possible to monitor internet communication, the volume of the information exchanged makes it very difficult to identify and monitor trends effectively. Similarly, respect for personal freedoms is growing all around the world. This means that governments cannot stop people from using the internet for any purpose they please.
The last decade saw the rise of e-Commerce as an important application of internet technologies. Companies like Amazon, Google and EBay are barely ten years old after attaining international recognition. What is of interest to economists is that government have little control over internet. Countries trying to control the internet have not been successful because of the ability to go around the controls instituted by those governments. The implication of this is that online economic activity is not under strict regulation from governments.
It is possible to create value online and to spend the proceeds derived from online commercial activities in a way that does not appear on any economic indicators such as those used to calculate GDP. For instance, someone in country A can write an article for private use by someone in country B, and receive payment for it via online money transfer services such as PayPal. The writer can then decide to use the money to buy an eBook written by someone in country C. In this situation, how do the governments in the three countries factor in the value created by their citizens online considering that the money transferred did not pass through the conventional channels?
Relevance of GDP in a Globalized Economy
The goal of this paper is to examine the relevance of GDP in a globalised economy. This section presents reasons why GDP may still be a valid measure of economic growth. The first reason that makes GDP relevant in the calculation of economic growth is that the need to measure economic growth has not disappeared. Regardless of what takes place online, economic planning cannot take place without using GDP as a measure. While the conventional methods of calculating GDP may miss the value created and transferred on e-Commerce platforms, it does not invalidate the data concerning economic growth of the conventional economy. This means that GDP will retain some relevance even with the growth of e-Commerce.
Secondly, GDP is still important because geopolitical boundaries are still present. These boundaries still control the flow of goods and services between nations. Each country has its policies that govern its macroeconomic environment even if the policies have fewer effects on e-Commerce. This means that governments still need GDP as a measure of economic growth to determine the macroeconomic policies needed to stimulate local economies.
The third reason for the long term use of GDP as a measure of growth is that some of the goods and services traded online still show on the current GDP measures. For example, Japan sells many used cars overseas on e-Commerce platforms. The money that people spend on these cars usually comes from salaries earned locally, or from businesses audited locally. In this case, both the Japanese government and the client countries can locate the purchases and the expenses made by their citizens on e-Commerce platforms.
The fourth reason underlying the continued use of GDP as a measure of economic growth despite growth in e-Commerce is that the overall volume of untraceable goods and service traded online is still very small. It is possible to develop a model for calculating GDP that takes into account untraceable transactions, along the same lines as the measures that account for activities in the black market.
Areas of Ineffectiveness of GDP in a Globalized Economy
The three main areas that threaten to render GDP irrelevant, at least in its conventional sense, are as follows. First, the calculation of global GDP may suffer from overvaluation because of multiple claims for the value created online. The internet has led to the development of products that exist only in electronic form. This means that it is difficult to tell where some products were created. For instance, a singer in country A can produce a song and market it online. An online marker in country B may decide to sell the music to someone in country C for a commission. Country A can claim that they are the original exporters of the music. Country B can also claim to have a right to benefit from the sale because of its participation in the sale. Country C on the other hand can fail to recognise the work of the musician and the distributor in country A and B because the music is now in the possession of a citizen of country C. GDP calculations for the three countries may wrongly include the full value of the music produced.
The second area of interest is a situation where e-Commerce grows too rapidly, without the development of accurate ways of measuring its contribution to GDP. The phenomenal growth of the internet is largely due to limited legal and political control over its development. E-Commerce also lacks strong regulation and monitoring because of the anonymous nature of the internet, and the lack of clear ways of determining jurisdictional authority. The result may be the development of a very large internet economy where no government can properly institute macroeconomic controls, much less measure its value accurately.
The third challenge that will restrict the growth of GDP as a measure of economic growth is its ability to capture value created in the cloud. Electronic products such as eBooks, songs, software, among others can be developed online, without any means for a government to know of their existence. If the proceeds from such goods and services remain online, then no government will have the means to include value created in the cloud in GDP calculations.
The Potential Future of GDP as a Measure of Economic Growth
The future of GDP as an accurate and reliable measure of GDP seems bleak if e-Commerce develops under the current conditions. Governments need to exert greater control over e-Commerce for GDP to remain reliable. This can be implemented by the licensing of payment vendors and demanding access to e-Commerce traffic for tax purposes. This can be effective only in cases where the specific payment vendors operate within the boundaries of a specific country.
The second option that governments have to retain the stature of GDP as an accurate measure of economic growth is to redefine how GDP is calculated. Calculation of GDP includes estimated commercial activity in the informal sector, and the black market economy. Similarly it may be possible to create GDP calculation models that will estimate the volume of e-Commerce transactions for economic valuation.
The third option for governments is to create an intergovernmental agency that will regulate e-Commerce and assign GDP estimates to all countries based on data from regulatory measures. This method seems to be the most effective way of documenting commercial activities online, but it is also the most difficult option to apply. In conclusion, e-Commerce is bound to make GDP calculations more complicated, and GDP values will become less reliable, unless governments use regulatory strategies to document online commercial activities.
Guttal, Shalmali. “Globalisation.” Development in Practice 17.4-5 (2007): 523-531. Print.
Zatzman, Gary and Rafiqul Islam. Economics of Intangibles. New York, NY: Nova Publishers, 2007. Print.