Today, the Gross Domestic Product is presented as the king of economic indicators. However, how did a country know if it was growing before economist Simon Kuznets created GDP?
The GDP, as a standardized economic indicator, allows us to get an idea of the evolution of the economic activity of a country and even allows comparisons between different nations.
It is true that, as we pointed out in our article “The GDP: an indicator with many limitations”, this meter has many shortcomings. Among other things, we can highlight that growth is only measured by the increase in production, but does not take into account the quality of production or the way in which wealth is distributed.
In any case, the truth is that, to investigate economic events before GDP, historians and economists encounter certain difficulties. And it is that modern economic indicators did not begin to be used until the 1930s and 1940s. From then on, official public organizations began to compile their economic statistics.
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However, one wonders what references were used to measure the good or bad performance of the economy. Let’s start by going back in time to a civilization as fascinating as Ancient Egypt.
The Nile as an economic indicator
There is no doubt that the Nile was the central axis of the economy of Ancient Egypt. A stable and consistent flow guaranteed agricultural production, food supply and trade. In fact, the Egyptians carefully analyzed the water levels of the Nile River.
At that time, the Egyptians saw the mighty Nile as a gift from the gods. Thus, the population worked busily and made offerings to the gods.
They were not only limited to religious offerings, but they were also able to detect the moment that the economy was going to go through thanks to the so-called “nilometers”.
In this way, priests and pharaohs, thanks to the detailed analysis of the flow of the Nile, sent messages in a certain direction to the population.
But what is a nilometer? The nilometer was the reference measure in the Nile River. To do this, wells were dug in a staggered manner that allowed the river flow to be measured.
Thanks to this, it was possible to predict if Egypt would face a period of crisis and famine or if it would go through a period of prosperity and abundance of food. Based on these measurements, the taxes that were going to be established or the production that the crops were going to provide were determined. Even the management and organization of the works was determined according to the water levels.
For this, nilometers such as the one in Cairo, Elephantine in Aswan and the Kombo Ombo were created.
Faced with a rise in the water level of the Nile, the Egyptians had mud walls to retain the precious liquid in the fields. It is true that the water ended up evaporating, but this practice allowed the land to be cultivated.
However, an increase in the flow was not always synonymous with economic and social prosperity. The water might not reach the farthest reaches of the river, or a flood might wash away the houses. Hence, dams were erected to control the flow of water.
The origins of national accounting
Thanks to Marco Polo’s trips to the East, the trade routes experienced a great development. This is how accounting and the double-entry method arose in Italy. In this way, fraud was avoided, the movement of commercial flows was recorded and the bank could exercise certain control over its activity.
Colonialism, developed by the great overseas empires such as Spain, England and France, dramatically boosted trade. Exchanges flowed between the metropolises and their colonies.
It became essential to develop a national accounting that would allow measuring economic development, transaction flows and the evolution of demography.
It was the 17th century and England was immersed in a war with Holland. Paying for the war required significant resources and England needed to know what means it had and if it was possible to increase taxes. It was then that the English economist William Petty began to develop methods to calculate the size of the population, expenses and income, as well as available land.
In fact, Petty was able to implement a double-entry accounting system in which the country’s national records were collected. Thanks to Petty’s techniques, England was able to calculate the necessary increase in output or its ability to raise taxes. By contrast, France, England’s great power rival, lacked such a registration system.
Despite the development of the first national accounting techniques, these records were still too primitive and were not comparable internationally. Thus, everything was limited to the amount that the State had to spend and what was left to increase the assets of the country.
18th and 19th centuries
The celebrated 18th-century economist Adam Smith, considered by many to be the father of modern economics, also made a remarkable contribution to what was involved in measuring and recording economic growth.
Smith believed that only trade, manufactures, labor, and the fruits of the land should be taken into account in national income. As for national spending, Smith argued that everything that the people consume and spend should be valued.
Years later, Adam Smith argued that only those who took part in the manufacture of goods, worked in the fields or in factories should be counted for national income. All this meant that services were left out of national income.
It should not be forgotten that Smith also stated that the wealth of a nation was made up of physical assets from which the country’s debt had to be subtracted.
Curiously, in the 19th century another distinguished economist, Alfred Marshall, disagreed with Adam Smith. Marshall distinguished between material and immaterial wealth and argued, therefore, that services should be part of the national income.
Meanwhile, as the 19th century progressed, in Europe and North America, mathematics, statistics and macroeconomics were taken as instruments to develop the first statistics and records at the national level.
And in the end, the GDP
The world suffered with all its harshness the ravages of the crash of 29 and the Great Depression. US President Franklin D. Roosevelt was looking for a way to quantify the damage suffered by the US economy.
That is how the US president entrusted a titanic task to the economist Simon Kuznets, who at that time was teaching at universities such as the Wharton School of the University of Pennsylvania, John Hopkins and Harvard University.
In this way, Kuznets and his people traveled around the United States collecting data on expenses, production and consumption of North American companies. They added the value of what was obtained in the different stages of production and in 1934 the GDP, or Gross Domestic Product, was already a reality.
With the world embarked on a world war between 1939 and 1945, the GDP, as an indicator of production, was consolidated, since it was necessary to know the amount of war material produced and not aspects such as social welfare, prosperity or the distribution of wealth. .
Moreover, after the war, the GDP ended up becoming the great reference economic indicator, being standardized at the international level and used in international institutions such as the UN.