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【Liu Shijin】GFP and GFP-driven Economic Growth


As a total-amount index of economic acitvities, gross domestic product (GDP) plays an irreplaceable role, yet it has caused a lot of controversy. Humanity’s understanding of the overall results of human economic activities has gone through a long process, in which the emergence of the GDP index is undoubtedly of great significance. From the perspective of GDP we are able to see the overall size and basic structure of economic activities, then macroscopically understanding and analyzing economic performance and long-term development.

With China’s further reform and opening up, the system of national economic accounting (SNEA) widely adopted by the market economies has replaced the system of total output value statistics adoted by the former Soviet Union for its planned economy. As the total-amount index of SNEA, GDP has been taken by governments at all levels as the primary index for measuring their development achievements. A special form of market competition in China takes place between local governments, which are also the subjects of competition. By improving the allocation of their own immovable resources, all provinces, municipalities, counties, townships and even villages compete with their counterparts for more movable resources. The criterion for judging the winner or loser of such competition is nothing but GDP, and therefore the competition can be called a “GDP contest”.

While promoting remarkable economic growth, competition has caused a lot of problems such as serious environmental pollution, excessive consumption of resources, widening income gap, etc. As a result, criticism of GDP has increased and some critics have blamed these problems on the pursuit of GDP. Indeed, the GDP index itself is not perfect. For example, it fails to include the negative environmental impacts of economic growth, cannot directly reflect the efficiency of regular growth, and tends to mask structural problems. Therefore, a series of efforts have been made both at home and abroad to improve the GDP index, ranging from introducing the concept of “green GDP” to including R&D costs into GDP statisitcs. Despite these fruitful efforts, it is still impractical and unreasonable to try to find a perfect index to avoid the above problems in development.

In fact, it is not difficult to understand that the real problem behind the GDP index lies in “institutional mechanisms”. If we set a more balanced and sustainable development goal we will be able to find the corresponding complementary indexes and establish a corresponding incentive mechanism. Therefore, improving the performance evaluation index system of cardres and governments and deepening government system reform have logically become an important agenda for subsequent reforms.

Here, our critical discusson about GDP is from another perspective. GDP is generally considered to be the “final product”. Is this understanding correct in the real operation of economy and society ? This is a question that needs to be raised here.

From the perspective of aggregate demand or expenditure, GDP consists of consumption, investment and net exports. To measure the whole society’s value newly created in a certain period of time, GDP statistics is usually made on a quarterly or yearly basis. However, if taking a wider perspective we will find that what is really consumed by and in direct relationship with consumers is only one part of GDP while the other part, e.g. machinery, workshops, etc., returns to the production process. Obviously, the final product within the statistical period is different from that within the “natural process”.
Another question is: Are all the products listed into the category of investment are of the same attribute and use? Evidently, housing, infrastructure, machinery and equipment under this category are of significantly different attributes and uses.

The main reason for housing being included into the category of investment is that it has the capital attribute and capital gains can be obtained through rental or sale. But the primary or fundamental attribute of housing, as a kind of durable consumer goods, is to meet people’s living needs, and this attribute is not substantially different from that of an automobile, a refrigerator or any other durable consumer goods. If a person buys a house as a means of investment, the house must then be used by another person rather than himself/herself; otherwise, no capital gains can be achieved. In other words, the investment attribute of a house is based on its consumer goods attributes. On the other hand, with the deepening of financial services, a variety of consumer goods have been endowed with certain financial attributes. For instance, when cars and refrigerators are purchased in installments they will be included into the process of financial gains and will have the charateristics of investment returns. In fact, however, most houses are used by the owners themselves, so they are not in the category of investment.  

Such attribute-related confusions also exist in the field of infrastructure. Parks, theaters, libraries, city squares, highways, etc., have a lot to do with the improvement of people’s quality of life, the upgrading of the consumption structure, and especially the growth of service consumption. They usually appear in the form of public products, providing specific consumption functions. Residents living in bustling cities can go to the park, dance at the city square, enjoy operas at the theater, or travel to distant places by highway. Without these infrastructure facilities, people’s consumption level would surely be down. The gap between urban and rural residents' consumption levels, to a large extent, is due to the difference in the availability of such infrastructure. Of course, part of the energy, transportation, communications, water conservancy and other infrastructure facilities directly serves the production process, but with the development of economy and the increase of the proportion of the tertiary industry, the non-productive part of infrastructure that directly serves residents' consumption is gaining an increasing proportion. In reality, however, the boundary between the productive and non-productive functions of infrastructure is blurry. For example, a highway has both passenger transport and freight transport functions, so it is technically very difficult to define whether it is productive or non-productive infrastructure.

Including housing and infrastructure into the category of investment is in conflict with their inherent consumption attributes and also contrary to people’s daily experience. When people regard them as far away from or even irrelevant to consumption, there may be inaccurate or even wrong judgment of the overall structure and situaton of national economy. This issue will be discussed in detail later.

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