GDP Will Reflect “AI”, But How Focused Should We Be On It?

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Should we care about Gross Domestic Product (GDP)? Does GDP reflect what matters? Is GDP a good measure? Recently, an influential tech podcaster and interviewer, Dwarkesh Patel, brought up the topic in the following context:

“As measured by GDP, AI will be super undervalued. How would the datacenter of geniuses show up in GDP? GDP would show raw inputs (aka chip & energy), and raw outputs (aka cost of tokens). But wouldn't clearly reflect the value of the crazy new [stuff] that's being cooked up in those tokens. Similar problem to how the Internet's value is undercounted today (since many products are free, and thus contribute nothing to measured GDP).”

Dwarkesh Patel is both right and wrong. To understand why, we need go over what is the GDP measure, why we measure it, and does it capture what matters to us. 

Article Overview

• Section I. Creation of “GDP” – the history of the measure and what it exactly measures

• Section II. How AI (and other technologies) impact GDP – why low cost production such as AI will show up in GDP

• Section III. Beyond GDP – what else matters for happiness

I. Creation of “GDP”

The GDP measure was invented by Simon Kuznets, a Nobel-Prize winning economist around 1937. It started to be used globally in 1944, after the Bretton Woods conference.1 The measure itself is relatively simple: it attempts to value the overall economic output of a given country by using the transactional value (in currency) of goods and services. Broadly, GDP (“Y”) comprises the value of consumption (i.e. goods and services you buy), investment (i.e. people's savings that are used for investing into things such as infrastructure, research etc.)2, government spending, and lastly net exports (i.e. the difference between exports and imports). GDP is simply an accounting identity, often written out as:

Y = C (household consumption)  + I (business investment) + G (government spend) +