Every three months we get a new estimate on how much our economy grew or shrank. This number comes from the Bureau of Economic Analysis (BEA) and is fairly well known even amongst the non-economics crowd. It’s the gross domestic product (GDP). GDP attempts to measure the economy by basically adding up every dollar that was spent. If you bought a pack of cigarettes, that goes to GDP. If you paid your cell phone bill, GDP. If your company built a new office, GDP. The total amount of money spent in the economy is added up and that’s the GDP. When GDP falls for a couple of periods, we have a recession. For the most part, it grows.

Measuring GDP is an imperfect science. With hundreds of millions of people out there consuming and investing, you can’t measure it all. Every once in a while the way GDP is calculated gets changed. The most recent update includes some items that were not previously counted. This itself is not without some controversy. But the idea is to get a more accurate measure of the economy which helps drive better decision making for the country.

But GDP isn’t the only way to measure the economy. The assumption in GDP is that if we are spending more, then we are probably happier. So we’d like to grow GDP further. But even if that were true (it’s up for debate), there may be better measurements of the economy. Gross Domestic Product basically shows how much money was spent (as a proxy for how much was made), but there’s also Gross Domestic Income (GDI). GDI is also a proxy for how much was produced, but it instead measures how much we made. So the difference between the two is one measure production based on how much was spent, the other measures it based on how much was made.

GDP vs GDI

Theoretically of course, these numbers should equal. But because we are human and imperfect, they don’t always match up. Over the long-term the two measurements pretty much move in tandem. But over the short term they can be a bit different. Just looking at the chart of the two here, you can see that GDI fell further in the recession and has since recovered higher. This would mean that the recession was worse than we thought, and the recovery stronger than we’ve been seeing.

Neither one is more accurate than the other, they just go about measuring the economy differently. It’s helpful to keep an eye on both. For example, growth in GDP has been someone stagnant lately. But the recovery in jobs would indicate that the economy is indeed growing more than GDP might indicate. A quick glance in GDI shows the jobs numbers more in line with this measure of economic growth. Again, no measure is more right than the other. But having both can help serve as a check a reality check in case one isn’t really telling the story other data might be doing.

Suggested Reading: Is The Economy Doing Better Than GDP Suggests? (WSJ)

categories: economics