Gross domestic product, or GDP, is a pretty important statistic for economists. It’s probably given even more importance by the general public who may not be aware of its limitations (and that link is a very incomplete list of them), but I digress. But what is GDP exactly? The OECD defines it as:
Gross domestic product is an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs). The sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers’ prices, less the value of imports of goods and services, or the sum of primary incomes distributed by resident producer units.
That’s a bit of a mouthful, but in brief, GDP is a measure of “value added”. For a manufacturer, it’s the final value of the product, minus the cost of the inputs used to make it (steel, energy and so on). For a retailer, it’s the sale price of that pair of Nikes, minus what it cost to get them to the store. For the entire economy, it’s the value of everything created, minus the inputs we brought in from overseas – raw materials and manufactured goods we don’t make here, financial services and so on. As it turns out, “petroleum and products” (which includes crude oil, petrol, diesel and so on) is our largest category of imports.
In 2013, we spent $7.7 billion importing “petroleum and products”, although note that on the export side we also exported $1.7 billion of crude oil. This compares to our total GDP of $212 billion, so these are not inconsequential numbers – something like 3.5% of all the value we produce in New Zealand is needed to pay for those oil imports. The share of GDP needed to pay for oil is much higher today than it has been in the past, as discussed in this paper:
Reduce oil use, increase economic growth
Most of the discussion around GDP focuses on economic growth. How do we grow the economy – meaning growing GDP from one year to the next – and enable a better standard of living as a result? To grow GDP, we need to increase the value added by the New Zealand economy. That can mean producing more. It can also mean producing more efficiently. If we manage to create the same level of output while using fewer inputs, we’ve managed to increase our GDP, with all the benefits that can bring, and we’ve increased our productivity and efficiency, which has to be a good thing.
Following on from this, if we can reduce our dependence on imported oil, while still producing the same level of output, we’re growing GDP.*
One of the big investments the government makes each year, and I’m including councils here, is in maintaining and expanding the transport network. Transport is, of course, vital to the smooth running of the economy, and the direction that the government sets in making new investments – i.e. what new transport projects it chooses – will have a strong bearing on our future economic growth.
So, is the government really making the right transport investments to boost our future economic prospects? We’ve seen the Roads of National Significance, a low-value programme if ever there was one. Most of the roads perform poorly on Benefit Cost Ratio measures, and despite the rhetoric about how these roads will help to grow the economy through making it easier for freight to travel, etc etc, there’s very little evidence to suggest that they’re not just throwing money down the drain.
At this point in New Zealand’s development, with our current infrastructure and options, the best way for the government to grow the economy via transport investment is to invest in public and active transport. This will help to chip away at our dependence on oil, and that’s going to help GDP growth. That’s where the government can make the biggest difference at the margin; we’re so underprovided with these transport modes that we can get a lot of value out of some relatively small investments (including, of course, the Congestion Free Network).
Incidentally, this could also save money and increase GDP by reducing the capital investment we make in vehicles – a bus is a lot cheaper than the 40 cars it could replace, and a bike is much cheaper than the car it could replace (well, depending on the bike).
Auckland is crying out for better public transport. We’ve got the density, we’ve identified the projects, we’re well below equivalent cities in our public transport usage and we know the problem is with infrastructure. There are glaring gaps in the transport services being provided for Auckland, and all it takes is a realignment of funding to achieve much greater public transport use, with greater cost efficiency.
There’s nothing complicated or magical about this. Actions that reduce our oil use, and which don’t have some other compromising effect, will boost our GDP and help New Zealand become a more efficient and productive economy. Investments in public transport, properly scrutinised and prioritised, are likely to do just that.
* I need to add a little bit of a disclaimer here, though. There are plenty of things that increase GDP in the short term, but don’t mean we’ll have a larger and wealthier economy in the long term. Take the Canterbury earthquakes, for example – the rebuild is boosting GDP as the construction sector gets a shot in the arm, but in reality tens of billions of dollars have been wiped off the country’s wealth. Similarly, building infrastructure which costs more to build than it is “worth” on completion is a recipe for wealth reduction – and that’s likely to be an issue for many of the Roads of National Significance. There are plenty of public and active transport investments that we could make which would do much better in creating long-term wealth.
Even things that grow GDP and wealth may not be worth it – they may have some other impacts on our quality of life. We could all live in one bedroom flats, wear clothes till they fall apart and so on,but we might not really feel better off for doing so. I don’t think investing in public transport falls into this category.
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You forgot to account for the 5 billion dollars you spend each year importing vehicles to provide people with mobility they could have with public transport if you had a more rational urban development pattern. So that’s about 6% of GDP that flees your economy to feed car-oriented development each year. Meanwhile, as the vast majority of public transport spending is labor, the money largely stays in the community where it is spent.
I’ve made the same case for my home of Québec, but we’re even worse off than you, we import for 27 billions of Canadian dollars of goods to feed our car addiction, which represents about 8,7% of our GDP that flees our economy and enriches other countries.
GDP is like the BMI of economic measurements then? Broadly useful, but nothing to hang your hat on. Thanks for providing some context to this.
I’ve thought for a long time that NZ would be much better off if it didn’t squander so much money burning oil or buying machines from overseas that depreciate so rapidly!
The case for investment in Public and Active Transport is stronger of course for cities. And strongest still in our biggest and densest one. Which also happens to be our most productive and fastest growing one too.
Wealth isn’t just made by moving heavy things through the countryside. Cities required right-shaped systems to improve their economic performance.
The whole country benefits from city-shaped thinking and investment in cities, just as the provinces have their specific needs.
Interesting article, and I like the link you’ve drawn between transport investment and GDP.
Crucially though, GDP will only be boosted by “actions that reduce our oil use, and which don’t have some other compromising effect.” Petroleum products are far too vital for the production of GDP, so a compromising effect will always be present to some degree.
Despite this issue, you have made yet another strong point in the case for more investment in public transport. Especially in Auckland, where far too many life-hours and litres of petrol are consumed by congestion. Invest in PT and you save both.
You need to provide some balance and also look at the costs of a PT heavy system.
Trains in particular need huge subsidies to run at cost efficient prices to the consumer. So whilst there may be a saving to the individual further investment in PT will undoubtedly result in increased rates and taxes over and above inflation (Auckland rates projections a case in point). You also need to factor in that increased land values result in a loss of living space (not to mention increased house prices/rents) and that contrary to some people’s beliefs not having a car does result in a mobility loss and the ability to make ad hoc travel decisions.
How you can make a statement like “Reduce Oil use increase economic growth” without an evaluation is quite staggering
Matthew, I think most of what you’ve said there is either incorrect or not relevant to what I’m writing about in this post. Firstly, it’s completely wrong to say that investment in PT means increased rates and taxes. Instead, we need to repurpose some of the funds we already collect (and which we overwhelmingly spend on roads). Hence, the Congestion Free Network.
Secondly, the bit about trains needing huge subsidies is wrong. Per-passenger-km operating costs in Auckland are dropping like a stone, mainly because of the electrification process, and also because patronage is increasing rapidly. The old stats about the average subsidy being $17 per trip or whatever it was are way out of date. Furthermore, train trips deliver very significant positive externalities with their ability to reduce congestion for road users, and my recollection is that even for the old stats, those benefits were much higher than the subsidy, meaning that the subsidy is likely to be efficient and improve societal welfare.
I’m an economist, and as a profession we are much more likely to couch our statements in very careful language than to make a sweeping assertion that we don’t think can be backed up by evidence. I wouldn’t make the assertions in this post if I wasn’t very confident about them.
Matthew Roads are subsidised too. All transport is subsidised, it is a question of by how much and at what value. Vital to this not simple picture is understanding the interplay between financial and economic factors. It is not apparent form your comments that you are particularly clear on that difference.
Actually investing in the right PT projects allows us to reduce subsidies due to making it attractive enough that it gains significant additional patronage. The CRL adds extra opex costs but also adds significantly more patronage so cost recovery improves and that’s before taking into account the economic benefits. The northern busway is so successful in attracting people it now requires no subsidies to run services on it.
In general PT systems scale up better both in capacity and financially than road focused systems.
Matthew do you think roads are not subsidised? The RONS programme alone is around $14 billion. That equates to at least half a billion dollars in cost of capital alone – every single year! Not to mention the maintenance (a few hundred thousand per kilometre per year).
If we had good PT, the effect might not be that we don’t have cars at all, but we might have LESS cars.
So instead of a car for every adult in the household, we might be able to get by with one car. That is a massive saving. My family is able to have only one car, and yes we have a child, because I cycle and use PT for 95% of trips when it is just me travelling. According to the AA, that saves my family $5,000-$10,000 a year.
The Netherlands has one of the highest car ownership rates in Europe, even with 10% of kms travelled being covered by bicycle. That is because a car is a travel tool that is great for some jobs – like intercity travel or transporting larger groups – but not very good for a single person travelling in a city.
Unfortunately, our current system gives us only one real tool for travel. So most of the time, we basically use a hammer to put in screws.
One of the weaknesses of GDP is that it misses out any measure of quality of the items we buy or the utility we get from those items. I could sell two cars and walk everywhere and even at a pinch ride on a bus and it might lift GDP ever so slightly. But GDP wouldn’t include how annoyed I would be walking in the rain and standing wondering if the bus will actually turn up and then having to stand up and get thrown around, or sit squashed against a stranger while the driver does his best to give me motion sickness. Yes cars cost me money and so does the petrol but I spend that money happily because I get back a benefit that outweighs the cost.
New Zealand always pays more for the same goods compared to other countries
Our construction material are so expensive and the quality is lower.
We pay double for our mobile phone and electronics compare to US.
Our groceries are more expensive than Australia and choices are less.
Our tunnel building costs per km is high compare to other counties.
Our construction agencies quote as much as they wanted and NZTA just has to pay for it.
The lists goes on.
Unfortunately, our salary is still low in OECD level
Just for balance: I think you have to acknowedge all the hassle they goes with a car that does not go with PT. Garage bills, repairing accidental damage, losing keys, WOF tests, cleaning, stressing over the skills of other drivers, road rage, breakdowns, vehicle theft, trying to find a parking space, paying for a parking space, the unpredictable fluctuations in fuel prices, paying for somewhere to store the vehicle, buying a new one every X years, breakdown membership or charges.
Shall I continue? IMHO, trading in all this life-draining, expensive stuff for a PT based commute plus hire car or Cityhop is a good deal when it comes to quality of life. Just cos you want a car for some things doesn’t mean you are better off using it for everything.
+1 to this. Since getting rid of my car and relying on PT I have experienced all of these benefits, AND the benefit of having a lot more disposable income, which has led to other benefits (such as nicer wines, more trips and bigger TVs). No down side really. I still use a car (CityHop) when it makes sense too, but otherwise don’t feel as though my mobility has been reduced.
That’s fine as long as it is a choice. You are welcome to make that choice but it is not valid to defend a system that imposes that choice on other people.
The point is that there is very little choice for most urban people in NZ other than travelling by car. And that choice should be there so that other people can choose how to spend their money.
Unfortunately NZ has done what Australia does, become an economy of ticket clippers. But I blame the population for this – too apathetic, too unprepared to shop around or change their lives.
The free to air TV should have completely collapsed by now given the availability – legit or otherwise – of downloads. Other countries in Asia wouldn’t have sat around debating copyright and piracy rubbish.
The retail industry should have already had a massive stick taken to it, if only because online shopping and more overseas travel should have done even more damage to them than they have – because people are too timid.
It amuses me when you read complaints about flights from Asia having people of that background trying to take too much hand luggage on board, or having lots and lots of checked in baggage. Reality is they are more concerned about value for money of local products than others who don’t, hence buy up everything they can.
Because not enough people actually do this, the ticket clippers get away with unsatisfactory retailing, unsatisfactory financial products, poor telecommunications products and on it goes.
At least you guys can buy the Jap second hand cars, we can’t. And the lies they tell to justify this!
Investing in PT and intensification allows a single work places to hire a larger pool of skilled people.
This increase efficiency due to economic of scale.
Ultimately that will raise productivity and GDP.
Good argument. Makes sense. Reduce oil imports, more money to spend locally, growing the economy. If we replaced all imported oil with local biofuels, it would have a huge benefit for the economy because of money staying locally. Algae ponds anyone?
Is riding my bike lowering to GDP (when I could drive a car) to the shops to buy bread ilk etc?
Is growing our own organic vegetables a disservice to the community as it doesn’t register in GDP and is therefore lowering our nations standing?
Is painting our own house not in the public interest as it lowers the earnings of the painting contractors and is not measurable as GDP?
I read the other day that the cost of the maintenance of the tailings dam in the Corromandel was going to be horrendous but that the mining company is now long gone and these dams need to be maintained in perpetuity, now that is adding to our GDP and yet it is not producing anything?
The Christchurch rebuild is increasing our GDP but it is really about making good destruction so was the destruction increasing our GDP?
Should we have a civil war so that we can increase our GDP?
How is this measure (GDP) real?
What are the alternatives?
It’s because GDP is not a measure of value or of profit but simply a sum of spending. Bob Jones has pointed out how stupid it is by suggesting the air force could buy an elderly bomber and flatten a provincial city every few years and it would increase GDP due to the rebuild. Page 16 of this http://unstats.un.org/unsd/broaderprogress/pdf/How's%20life%20-%20Measuring%20well-being.pdf has a good description of the shortfalls of GDP including how if the cost of commutes goes up then so can GDP. They call that ‘regrettables’.
Well being is the alternative but there are dozens of views of what should be included. Some form of income or spending should be included but maybe not GDP.
From my reading, this post is not arguing that non-car modes are necessarily better than cars, or vice versa.
What it is arguing is that investment in non-car modes will tend to have positive macro-economic effects (measured in terms of GDP), because they reduce the need to import fuel/vehicles. In contrast, a greater proportion of expenditure on other forms of transport, e.g. public transport and walking/cycling, will tend to be recycled for goods/services that are produced within the domestic economic.
The reason I think this is interesting is because NZTA spends sooooooo much time arguing the “wider economic benefits” of their massive highway investments, which generally don’t stand up on their micro-economic impacts. In this context it’s very telling that NZTA’s economic assessments of non-car transport projects do not consider the macroeconomic benefits of reduced expenditure on fuel/vehicles.
Every litre of fuel that we avoid burning for private travel, and indeed every private personal vehicle purchase that is avoided, is likely to have a positive macroeconomic benefit to NZ Inc.