To monitor economic growth, statisticians and economists employ a variety of techniques. But over time, some economists have drawn attention to the shortcomings and biases in the GDP calculation. Relative productivity measurements are also maintained by organizations like the Bureau of Labor Statistics (BLS) and the Organization for Economic Co-operation and Development (OECD) to assess economic potential. Some people advocate gauging economic progress by changes in the standard of life, but this can be challenging to measure.
Gross Domestic Product
The logical next step in determining economic growth in terms of monetary expenditures is to calculate the gross domestic product. For instance, a statistician merely needs to keep track of the dollar amount of all the steel that entered the market during a particular time period to comprehend the productive output of the steel sector.
Total production is the sum of all industry outputs, expressed in terms of money invested or spent. That was the theory, at least. The tautology that expenditures equal sold-production does not, unfortunately, truly quantify relative productivity. An economy gets more productive not because more money is spent; rather, an economy becomes more productive because resources are employed more effectively. In other words, some method of measuring the link between total resource inputs and total economic outputs is required to determine economic growth.
According to the OECD, GDP has a variety of statistical issues. Its approach was to use multi-factor productivity (MFP) to demonstrate the contribution of technical and organizational innovation and to use GDP to assess aggregate spending, which theoretically approximates the contributions of labor and output.
Gross Domestic Product
Older people might recall learning about the gross national product (GNP) as an economic measure. GNP is primarily used by economists to understand the total revenue earned by a nation’s citizens over a specific time period and how those citizens use that income. GNP measures the overall income that the population receives over a predetermined period of time. Like GDP, it is just a measure of productivity and is not meant to be used as a gauge of a nation’s welfare or happiness. However, unlike gross domestic product, it does not take into account revenue accruing to non-residents within that country’s borders.
Up until 1991, the GNP was the main indication of the US economy’s health according to the Bureau of Economic Analysis (BEA). The BEA started utilizing GDP in 1991, even though most other nations were already doing so. The BEA attributed the change to it being simpler to compare the US economy to those of other countries.
The BEA still supplies GNP data, which it deems valuable for studying the income of US citizens, even though it no longer uses GNP to track the success of the US economy.
For the US, there isn’t much of a distinction between GDP and GNP, but in other economies, there may be a big difference. For instance, an economy with a large percentage of factories owned by foreigners would have a greater GDP than GNP. Due to local production, the factories’ earnings would be counted toward the GDP. However, because it benefits non-residents, it would not be counted toward GNP. A useful method of comparing the income generated in the nation and the income going to its citizens is to compare the GDP and GNP.
Efficiency versus spending
The disagreement over how output and spending are related is a classic case of chicken-and-egg economics. The majority of economists concur that total spending, after accounting for inflation, results from productive activity. They disagree, though, on whether rising spending represents growth.
Think about the following example: The typical American now puts in 44 hours per week of productive work. Let’s assume that through 2019, neither the number of employees nor the level of production will change. The same year, Congress adopts a law mandating a 50-hour workweek for all employees. It is almost guaranteed that the GDP in 2019 will be higher than the GDP in 2017 and 2018. Is this actually growing the economy?
Undoubtedly, some people would reply in the affirmative. After all, for those who place more importance on spending, total production is what matters. This question does not have an obvious solution for people who are concerned with productive effectiveness and the level of living. The average worker must forgo six hours of leisure time each week due to the law’s requirement to raise the number of hours worked; was this sacrifice worthwhile? To return to the OECD model, the GDP would be greater, MFP would remain the same, but the standard of living might have decreased even while the GDP was rising if the loss of leisure time did not outweigh the additional six hours of pay.
Which Main Indicator of Economic Growth?
Although there are other ways to gauge economic expansion, the gross domestic product is the most well-known and often monitored and reported indicator (GDP).
Which Economic Measure Is Better, GDP or GNP?
Compared to gross national product (GNP), which is primarily used to comprehend the total income of a country’s citizens within a specific time period, gross domestic product (GDP) is a more relevant indicator of the economy.
Which Are the Top 3 Economic Growth Indicators?
The Consumer Price Index (CPI), which gauges pricing power and inflation, and the Monthly Unemployment Report, which includes weekly non-farm payrolls, are two of the other key indicators of economic growth in addition to GDP.