What is GDP, how is it measured, and is GNP better?

Today the Bureau of Economic Analysis released its “advanced” estimate of 2018’s second quarter GDP growth.  At 4.1%, it was the fastest rate in four years, breaking out of what […]

Today the Bureau of Economic Analysis released its “advanced” estimate of 2018’s second quarter GDP growth.  At 4.1%, it was the fastest rate in four years, breaking out of what economists referred to as the “new normal,” a consistent growth rate that hovered around 2%.

While economic growth is great, few really understand what our statistics mean and how they are measured.  Below I copy a short section from The Common Sense behind Basic Economics (Lexington Book, 2015)which attempts to lay out a few factors that make up gross domestic product, whether there are better measures, and just how awesome the U.S. economy is.

From Chapter 14: The Greatest Economy Ever (Seriously, Ever).

(Copyright, Lexington Books.)

. . . Both [inflation and unemployment] affect our nation’s overall “gross domestic

product” (GDP), which is perhaps one of the most important measures of

our economy and is comprised of the sum of private consumption, investment,

government spending, and net exports (you’ll see an equation

similar to GDP = C + I + G + (X-M) in most econ courses). However,

economists again couldn’t just have a single measure, even for this single

measure. There are a number of ways of measuring GDP. Nominal GDP,

for instance, captures the total value of all goods and services produced

in a country using the prices of goods during that year. As the intelligent

readers of this book can surmise, that may not be the best measure when

comparing across time. If inflation causes prices to rise from one year to

the next, relying on nominal GDP measurements may lead to a false

belief that actual growth has occurred, even during a recession. For this

reason, economists use what they call real GDP, to account for these fluctuations

(not to be confused with the two latest measurements that a few

skeptical economists have come up with called “really real GDP” and

“this time I’m serious, GDP”).

 

Some consider “Gross National Product” (GNP) to be an even more

important measure of an economy. If you want to see how the country’s

citizens are doing and you want to exclude the value of assets that are

sent outside of the country, then this measure is for you. After all, money

sent to other countries by its citizens that reside here, doesn’t do a lot for us.

Certainly our economy gains from their efforts and production (while

Uncle Sam gets his cut), but when their earnings go elsewhere, our businesses

don’t gain from what they could have purchased here and our

markets don’t benefit from the capital that could have been used to promote

other forms of growth. A common example is the migrant worker

that comes to the U.S. and sends money home in the form of remittances.

 

On the flip side, American expatriates turn a lot of foreign currency

into dead presidents at home as well, which isn’t counted towards GDP,

but is towards GNP. (Side note: Americans are the only citizens of an

industrialized country who are taxed while living abroad, ostensibly because

the benefit of being a citizen of the greatest country on Earth follows

you everywhere.) Despite not having to pay U.S. taxes on their first

97,600 dollars of earnings, rules requiring foreign banks to comply with

certain U.S. reporting procedures who house American citizens’ money

combined with the potential for having to pay American taxes while

abroad, are two factors that are increasingly compelling some foreign-living

high earners to give up their U.S. citizenship. Swiss diva Tina

Turner recently relinquished her U.S. citizenship, which apparently is

slightly different than renunciation (and carries less of a traitorous undertone).

For this reason, some consider GNP to be a good measure of consideration

alongside GDP in order to see the full picture of what, or who,

is actually producing in the country.

 

AMERICA IS AWESOME

All of these indicators have served to show one of the great things about

the modern economy: it just keeps on growin’. Yup, it’s pretty awesome

when you think about it. We have our ups and our downs, but over time,

especially here in the U.S. where we have the largest and most dynamic

economy on Earth, there is a constant trend upwards.

 

This upward trend is a rare occurrence around the world throughout

history. Did you know that Jesus and Moses actually wore the same

brand of sandal? Lifestyles didn’t change much for most of those depicted

in the Bible, despite spanning more than a couple thousand years.

Today, on the other hand, someone from the Millennial generation could

have witnessed the invention of the internet (at least it becoming available

for use by the average civilian) to unmanned military aircraft to the

creation of the world’s first car that drives itself, and I’m quite sure all of

this will be very old news by the time you read this book. We’ve become

the world’s only superpower in a very short time and now have “poor”

people that live better than most of the middle class in the rest of the

world.

 

The problem is that these incredible levels of growth aren’t happening

to every country (just compare our GDP to, say, Burundi). It’s also important

to note that many are concerned that even the strongest economy on

Earth is showing signs of weakness, indicating a need for economic reform

within our own borders in order to ensure we continue growing,

even if it means growing at a milder pace.

 

Our economy didn’t become the largest, most productive, stable,

powerful, and dynamic ever in the history of everything (#Merica) without

a little effort. Our Founders realized it would take work and our

policies throughout our country’s history have been shaped by the idea

that we need to continue to incentivize growth in order to retain our

status as number 1 . . . in history, ever (did I mention we’re awesome?).

 

There are a million ways to measure our economy. Whether using the

common measure of GDP growth, or some other combination of other

measurements, all signs point to one truism: America really has produced

the most infallible, resilient, and consistent economy the world has

ever seen. But, it took a lot of work to get here and it sure isn’t perfect.

Sometimes we have to give our legislators a little leeway to protect it,

sometimes we need to tighten their leashes to protect ourselves. That’s

why it’s so important to understand what these measurements are and

what they really mean.