Tag Archives: gdp

Gross Domestic Product Grows at 2.0 Percent or 2.3 Percent

The Bureau of Economic Analysis (BEA) reported today that the U.S. real Gross Domestic Product (GDP) grew 2.0 percent last quarter over the previous quarter at an annual rate. But if you compare GDP in the most recent quarter with the same quarter in 2011, real GDP grew at a 2.3 percent annual rate.

Europe – indeed most other countries – report GDP growth on a percent-change-from-the-previous-year basis, comparing the most recent quarter with the same quarter last year. In other words, how big was the economy in July/August/September 2012 compared with July/August/September 2011, after adjusting for inflation?

But not here. In the U.S., the Bureau of Economic Analysis (BEA) reports real GDP growth on a percent-change-from-previous-quarter-at-an-annual-rate basis. In other words, how big was the economy in July/August/September 2012 compared with April/May/June 2012, adjusted to an annual growth rate instead of quarterly and adjusted for inflation?

Why the difference? Beats me. It could just be a case of, “We’ve always done it this way”, or even “We’re the U.S. and we’re different”. I know that the U.S. clung to Gross National Product (GNP) over Gross Domestic Product (GDP) for years even though the rest of the world was reporting GDP. So it’s possible that the BEA is just being conservative.

Regardless of the reason, I prefer the change from previous year to the change from previous quarter, and not just because it makes the U.S. number more comparable to the rest of the world.

First, looking at the annual changes gives a clearer picture of the longer term trends. It also is less susceptible to distortion due to one-time changes and thus doesn’t have as much random variation. That make it less noisy, as economic signals go.

Finally, the annual number eliminates the confusing “quarterly change at an annual rate” concept. Sure, I understand what that means, but do most people? Why make things so complicated and convoluted?

Of course, as is usually the case in economics, there’s a trade-off. While the change from previous year shows trends better, it doesn’t show immediate changes quite as clearly. Focusing on the annual change thus could make it hard to spot a turnaround right away.

On balance though, I prefer yearly to quarterly. When it comes to economic data, I’ll take smooth over noisy any day.

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GDP as an End in Itself

A friend of mine was telling me today that Europe is a basket case, past its prime, beyond hope. I should point out that my friend was talking about the economies of Europe, and he tends to view things as pretty black and white.

I lived in Europe for 7 years, and I like Europe. Sure, it has its problems, but it’s no basket case. Okay, some of southern Europe is a basket case, but most of Europe would be doing pretty well right now were it not for the debt ailments of the south and the austerity treatments intended to cure them.

What my friend was really saying was that the Gross Domestic Products (GDPs) of European countries are probably not going to grow as quickly as the U.S.’s GDP will in the future.

This may or may not be true. I probably could come up with evidence in favor or against. No one can predict the future with any certainty, and my guesses aren’t much better than anyone else’s. But I’m not going to argue that issue one way or another.

My problem is with using GDP growth as the end-all only-thing-that-counts gauge of how a country’s doing.

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I’ve written before about problems with Gross Domestic Product. GDP is the total amount of goods and services produced by a country in the course of a year. Growth in real GDP is the single best measure we have for economic progress, but there are so many problems with it that focusing on it to the exclusion of all other factors does more harm to a country than good.

GDP isn’t an end in itself, or at least shouldn’t be, any more than we earn our incomes just to roll around in piles of cash. People earn money in order to live and try to be happy. A country produces GDP so that its people can live and try to be happy. GDP is just a means to an end, a way for the people of a country to try and try to be happy.

Increases in GDP can be great for quality of life. GDP includes everything from MP3 players to heart transplants, an everything in between. That covers a lot of stuff that can make our lives richer and fuller and more rewarding, giving people more opportunities and chances for that happiness that we all crave.

But you want to know a little secret? Increasing GDP doesn’t necessarily mean the people are better off. There’s an old economist joke. Actually, there are thousands of old economist jokes. But one comes to mind:

Two economists are walking home together after work. The first one says to the other, “I’ve had a horrible day, and I’m very angry. I really want to punch someone in the face. Tell you what – I’ll give you $500 if you’ll let me punch you in the face.”

The second economist thinks about it for a second. He could use some extra cash, so he takes the deal. The first economist punches him in the face and gives him $500.

“There!” says the first economist. “I feel much better now.”

The second economist says, “But now I’m angry and want to punch someone in the face. Tell you what. I’ll give you your $500 back if you’ll let me punch you in the face. Deal?”

The first economist is now in a great mood and so agrees. The second economist punches him in the face and gives him the $500 back.

They continue walking along, and the first economist says, “Now I’m in a bad mood again. We’re back where we started, only now we both have sore faces.”

The second economist says, “Yeah, but look on the bright side. We’ve increased GDP by $1000!”

Unfortunately there’s a little too much truth for comfort in this joke. Technically, the two had increased GDP by $1000, though it’s unlikely that the Bureau of Economic Analysis would ever find out about it and include it in their figures.

The point is that increasing GDP doesn’t necessarily make anyone better off. It’s just a number, a measure of economic activity. Nothing about it says that economic activity is actually good.

Don’t get me wrong. Holding all else constant, increasing GDP is better than not increasing GDP any day of the week. But the problem is, all else is never constant. Things are never that simple.

So I take issue with the idea that Europe is a basket case, or beyond hope, or in any generalizable way destined for future failure or insignificance.

Yes, Europe generally has higher and more progressive taxes than we do in the U.S., and that has implications for future GDP growth Europe. But that’s hardly the end of the world.

GDP for the sake of GDP is not just misguided. It’s silly, wasteful, and counter-productive, just like money for the sake of money. It’s time we move past this obsessive focus on GDP as an end in itself, and start thinking about what GDP is for and why we want it to grow.