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Thursday, June 13, 2013

GDP: I Do Not Think It Means What You Think It Means

GDP: I Do Not Think It Means What You Think It Means

Derek Scissors, Ph.D.June 13, 2013 at 9:00 am

Foundry

Many decision makers and commentators treat gross domestic product (GDP) as if it measures the whole of the economy. They even use “the economy” and GDP interchangeably. GDP is an accounting device—and a poor measure of economic health. Household wealth is much closer to what we mean by “the economy.”

Say a new medical school graduate got a nice hospital job in 2011 paying $100,000 per year. However, she owed $150,000 in loans. Meanwhile, a retired couple had income of $50,000 in 2011 and an investment portfolio of $2 million, plus their home. If we compare 2011 income, the new doc is doing twice as well. Of course, this is ridiculous—why would anyone use one year’s worth of income to see how they’re doing?

Yet that is what we do with GDP: We take one year’s worth of production and act as if it’s the whole story or nearly the whole story. It’s just as wrong with GDP as it is with one year’s income.

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