Formal Versus Informal Social Construction

I recently posted on another blog suggesting that UNESCO should be involved in international discussions of "Gross Domestic Product in Intellectual-Property Products". That started me thinking about socially construction.

GDP is a formally constructed indicator. Economists developed theory about the total product of an economy and then proposed ways of measuring that product -- what would be measured, by what procedures with what frequency, etc. Eventually governments formalized the index, set up bureaucracies to gather the GDP statistics, institutionalized the process and began to publish GDP statistics. Eventually international bodies sought to achieve international agreement so that the measures of GDP would be comparable between countries.

GDP is measured in money. Money is itself a social construct. My wife and I have been watching a television program, House Hunters International, which follows people finding homes to buy or rent in countries other than their own. Watching shows it becomes very obvious that the costs of very similar dwellings vary greatly from place to place. Indeed, we now see international GDP comparisons made in terms of Purchasing Power Parity.

Source

I suspect that few people who regularly use the term GDP fully understand its technical meaning, nor the details of how it is measured. There is a tacit understanding that an economy is growing if the GDP is increasing and that a decreasing GDP if sustained is bad economic news. That informal understanding is sufficient that journalists can convey information quickly to a significant portion of the attending audience.

Do people realize that a billion dollars worth of property destroyed by a hurricane does not decrease the GDP, but the billion dollars that goes into rebuilding that property adds to the GDP? Do they understand the GDP impact of the eradication of smallpox; millions of dollars per year disappeared from the GDP when it was no longer necessary to immunize all children, inspect all foreign visitors, and provide medical treatment for the people sick with the disease; a great benefit to the public was associated with a decrease in GDP.

Thus GDP has both a formally constructed meaning by society and an informal social construction. Many people using their tacit understanding of the informally constructed meaning are likely to make significant errors in interpreting reports based on the formally constructed meaning of GDP. Thus during the housing bubble shown in the graph above, the construction industry saw in "artificial" increase in its product as houses sold for a number of years at prices that exceeded their historic values and that would not be sustained in the future -- and relatively few people understood what was happening.