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GDP size vs. the “real economy”

The Russia Ukraine war and the ensuing sanctions have revealed crucial information about the "global economy." Western analysts made fun of Russia for "having an economy smaller than Texas, same size as Italy," thinking that long-standing sanctions would render Russia helpless in a matter of weeks.

Indeed, on paper, with a population of 146 million people and estimated gross domestic product (GDP) of USD 1.58 trillion, Russia's economy pales in comparison to the likes of Italy with a population of under 60 million people and a GDP of c. USD 1.94 trillion.

But what has actually occurred throughout the conflict? The EU bloc economies have crumbled, the ruble has gotten stronger, and the euro has reached parity with the dollar for the first time in 20 years. The war has triggered global food shortages and Europe is bracing for energy blackouts.

How did the much larger eurozone economy ($23 T) get completely WRECKED by a much smaller economy ($1.4 T)? The composition of "GDP" provides some answers.

GDP is abstract numerical value computed by calculating total value of goods and services produced in a country per year. Much of western GDP figures are counting consumption like sales of retail goods (made in China or Mexico and imported to USA or Europe) as "production". Also, over the last 40 years, western economies have undergone a structural transformation into "information and service economies".

The "service sector," which accounts for a large portion of the western economy, is mostly "unproductive." Surely, we all need entertainment, loans, fun apps to use, and education, but these things might be all considered "non necessary" in this COVID world…

How much of the GDP in the West comes from tourism? Revenues from redundant apps, financial paper trading scams, debt repackaging "services," hotel, spa, and restaurant services? Charging exorbitant tuition to Chinese students? Intellectual property royalties?

Some economists are arguing to start fresh, to adopt a new methodology of economic weight, strength and importance: using economic metrics that are in essence, timeless. Those metrics would make sense to a Soviet central planner, or an American industrialist in the 1930's. Production of real tangible goods

In this new world order emerging, associated with decoupling and reshoring, increased political tensions between global superpowers such as US and China, energy crisis and transition, and rising inflation, a GDP methodology truly reflecting the country economic power, should probably overweight indicators associated with primary goods and industrial manufacturing e.g Coal, Iron, Steel, Gas, Oil, Electricity, Wheat, Meat. A back of envelope calculations show that Russia, US, China and India would be all competitive, while many European economies would look embarrassing and shallow. Bottom line: in the world to come, running hotels and tax arbitrage firms is not going to cut it....


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