Blog: What is GDP, how is it measured, and is GNP better?

Today the Bureau of Economic Analysis released its "advanced" estimate of 2018's second quarter GDP growth.  At 4.1%, it was the fastest rate in four years, breaking out of what economists referred to as the "new normal," a consistent growth rate that hovered around 2%.While economic growth is great, few really understand what our statistics mean and how they are measured.  Below I copy a short section from The Common Sense behind Basic Economics (Lexington Book, 2015), which attempts to lay out a few factors that make up gross domestic product, whether there are better measures, and just how awesome the U.S. economy is....From Chapter 14: The Greatest Economy Ever (Seriously, Ever).(Copyright, Lexington Books.). . . Both [inflation and unemployment] affect our nation’s overall “gross domesticproduct” (GDP), which is perhaps one of the most important measures ofour economy and is comprised of the sum of private consumption, investment,government spending, and net exports (you’ll see an equationsimilar to GDP = C + I + G + (X-M) in most econ courses). However,economists again couldn’t just have a single measure, even for this singlemeasure. There are a number of ways of measuring GDP. Nominal GDP,for instance, captures the total value of all goods and services producedin a country using the prices of goods during that year. As the intelligentreaders of this book can surmise, that may not be the best measure whencomparing across time. If inflation causes prices to rise from one year tothe next, relying on nominal GDP measurements may lead to a falsebelief that actual growth has occurred, even during a recession. For thisreason, economists use what they call real GDP, to account for these fluctuations(not to be confused with the two latest measurements that a fewskeptical economists have come up with called “really real GDP” and“this time I’m serious, GDP”). Some consider “Gross National Product” (GNP) to be an even moreimportant measure of an economy. If you want to see how the country’scitizens are doing and you want to exclude the value of assets that aresent outside of the country, then this measure is for you. After all, moneysent to other countries by its citizens that reside here, doesn’t do a lot for us.Certainly our economy gains from their efforts and production (whileUncle Sam gets his cut), but when their earnings go elsewhere, our businessesdon’t gain from what they could have purchased here and ourmarkets don’t benefit from the capital that could have been used to promoteother forms of growth. A common example is the migrant workerthat comes to the U.S. and sends money home in the form of remittances. On the flip side, American expatriates turn a lot of foreign currencyinto dead presidents at home as well, which isn’t counted towards GDP,but is towards GNP. (Side note: Americans are the only citizens of anindustrialized country who are taxed while living abroad, ostensibly becausethe benefit of being a citizen of the greatest country on Earth followsyou everywhere.) Despite not having to pay U.S. taxes on their first97,600 dollars of earnings, rules requiring foreign banks to comply withcertain U.S. reporting procedures who house American citizens’ moneycombined with the potential for having to pay American taxes whileabroad, are two factors that are increasingly compelling some foreign-livinghigh earners to give up their U.S. citizenship. Swiss diva TinaTurner recently relinquished her U.S. citizenship, which apparently isslightly different than renunciation (and carries less of a traitorous undertone).For this reason, some consider GNP to be a good measure of considerationalongside GDP in order to see the full picture of what, or who,is actually producing in the country. AMERICA IS AWESOMEAll of these indicators have served to show one of the great things aboutthe modern economy: it just keeps on growin’. Yup, it’s pretty awesomewhen you think about it. We have our ups and our downs, but over time,especially here in the U.S. where we have the largest and most dynamiceconomy on Earth, there is a constant trend upwards. This upward trend is a rare occurrence around the world throughouthistory. Did you know that Jesus and Moses actually wore the samebrand of sandal? Lifestyles didn’t change much for most of those depictedin the Bible, despite spanning more than a couple thousand years.Today, on the other hand, someone from the Millennial generation couldhave witnessed the invention of the internet (at least it becoming availablefor use by the average civilian) to unmanned military aircraft to thecreation of the world’s first car that drives itself, and I’m quite sure all ofthis will be very old news by the time you read this book. We’ve becomethe world’s only superpower in a very short time and now have “poor”people that live better than most of the middle class in the rest of theworld. The problem is that these incredible levels of growth aren’t happeningto every country (just compare our GDP to, say, Burundi). It’s also importantto note that many are concerned that even the strongest economy onEarth is showing signs of weakness, indicating a need for economic reformwithin our own borders in order to ensure we continue growing,even if it means growing at a milder pace. Our economy didn’t become the largest, most productive, stable,powerful, and dynamic ever in the history of everything (#Merica) withouta little effort. Our Founders realized it would take work and ourpolicies throughout our country’s history have been shaped by the ideathat we need to continue to incentivize growth in order to retain ourstatus as number 1 . . . in history, ever (did I mention we’re awesome?). There are a million ways to measure our economy. Whether using thecommon measure of GDP growth, or some other combination of othermeasurements, all signs point to one truism: America really has producedthe most infallible, resilient, and consistent economy the world hasever seen. But, it took a lot of work to get here and it sure isn’t perfect.Sometimes we have to give our legislators a little leeway to protect it,sometimes we need to tighten their leashes to protect ourselves. That’swhy it’s so important to understand what these measurements are andwhat they really mean.