Why Gdp Is a Bad Measure of How Things Are going
What is GDP?
Let’s do a quick review of what Gross Domestic Product (GDP) is.
GDP= C+I+G(X-M)
where
C= Consumption
I= Investment
G= Government spending
(X-M)= Net Exports (exports minus imports)
GDP represents the total dollar value of all goods and services produced within the economy. Typically it is used to assess the overall health of the economy by comparing changes in GDP from the previous year or quarter. For example, you might hear a headline like “GDP is up 3% compared to last year”.
GDP is also used to give us a relative measure of how bad things might be going. Economists define a recession as two consecutive quarters of negative economic growth, as measured through GDP.
GDP has become the most widely accepted measuring stick for how the economy is doing. But GDP has its shortcomings.
A poor measure of well being
GDP remains a good measurement of the total dollar value of the production of goods and services in the economy. However, it is a very poor indicator of the total welfare of a country or its citizens. One of my economics professors summed…
