Economic indicators are figures used to measure whether an economy is doing well or poorly. There are many different economic indicators, but gross domestic product (GDP) is special. GDP is the value of all products and services produced in a given amount of time. It’s often used as a measuring stick for how well a country is doing.
GDP can affect markets and elections. It can help influence how much it costs to borrow money, and it can sway business decisions. GDP has its critics. Some think it doesn’t measure enough information. Others think it measures too much or measures the wrong things. Some think focusing on GDP has negatively affected public policy. Still others think it does what it does just fine.
GDP numbers influence economic and political debates worldwide. In the U.S., investors anxiously watch GDP reports. They are looking for hints about when the U.S. central bank might raise interest rates, which will affect how much it costs to borrow money. In China, the government is very focused on GDP. This might be contributing to financial and social uncertainty in China. In Japan, shrinking GDP has been one reason why the prime minister wants to take extreme measures to boost the economy.
Politicians highlight GDP when things are going well. When GDP is low, they use it to argue for new laws. Economists often express other data, like debt and government spending, as a percentage of GDP. This lets them compare how much money a country is making to how much it has spent or owes.
In recent years, many have questioned the reliability of China’s GDP reporting. Investors are looking for other measures of economic performance there. Steel production and car sales are two ideas.
In 1665, an English economist named William Petty made the first careful attempt at calculating national income and spending. Since then, experts from Adam Smith to John Maynard Keynes have suggested changes to Petty's method.
The modern form of GDP was created during the Great Depression. During this time period, many people were out of work, and the U.S. was in a financial slump. Leaders were struggling to understand how the economy was doing based on measurements that were not exact such as railroad shipments and the stock market. Economist Simon Kuznets invented a new way to look at the economy. His system was presented to the U.S. Congress in 1937. The first estimate of what was then called gross national product followed in 1942.
Most countries now determine GDP using four types of data. They measure how much consumers spend, how much the government spends, investments in business and net exports. Net exports are the difference between the value of goods sold to other countries (exports) and the value of goods purchased from other countries (imports).
In the U.S., the government's Bureau of Economic Analysis uses a great deal of data to estimate GDP. This department determines whether the GDP rose or fell compared to the last estimate.
Critics tend to agree with what Robert F. Kennedy said in a 1968 presidential campaign speech. He said that GDP measures everything “except that which makes life worthwhile.” It doesn’t directly measure health, happiness or equality. It was never meant to, though.
Kuznets himself warned that GDP wouldn't be a strong indicator of social progress. A dollar spent building a prison counts the same as a dollar spent building a school. This has led to ideas for alternative measures of a country's well-being such as the Genuine Progress Indicator and Gross National Happiness.
Others argue that aiming for GDP growth has caused problems. It has led politicians to ignore environmental problems and encourage people to take risks with their money. It has stopped governments from fighting against a growing income gap between the richest and poorest people.
GDP has other shortcomings. It doesn’t accurately track all economic activity. Natural resources like forests and water don’t count toward GDP but using them up does. Much of the digital economy, like Google and Facebook, is free to use, so it barely shows up in GDP. And the slow pace at which GDP data is compiled is becoming a bigger problem in measuring a fast-changing economy.
Many economists would still agree with authors Paul Samuelson and William Nordhaus. They ranked GDP “among the great inventions of the 20th century.” Whether it’s suitable to the 21st century is perhaps a harder question.