GDP vs GDP per person
moneyrelations :: Mar.17.2008
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I’m paraphrasing a cliché, but if it walks like a duck, quacks like a duck - it’s a recession for the U.S. economy.
Just by going through the American pf blogsphere, you can read numerous articles on the rising cost of everyday goods. The American dollar is falling, inflation is rising, homes are foreclosing and the latest news is the sale of investment bank Bear Stearns to JPMorgan Chase due to the sub-prime mess.
Admitting to the term recession is very clinical and academic. According to Wikipedia: “a recession is a decline in a country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.”
Let’s also define GDP. Again from Wikipedia: “GDP is defined as the total market value of all final goods and services produced within a given country in a given period of time…”
But, if you look up the 2007 fourth quarter GDP for the United States, you’d find that it actually rose 0.6%.
So how do you make sense of the numbers when for all intents and purposes, most economists would admit the American economy is in a recession?
In an article from the Economist, it suggests that looking at GDP growth per person is a better indicator of economic performance than crude GDP. Immigration and population growth should be factored into economic progress as you take into account the output of each individual.
The following graph shows how slow growth population countries like Japan would actually be seen as more productive than the U.S. in recent years.
This could also explain why despite what the GDP says, the average American knows that individually, he isn’t any better off.
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The US gets a lot of immigrants, some legal and some not so legal. It is pretty clear that they contribute to the economy. These statistics would be interesting for that debate also.
Interesting too given that many of the countries “behind” the US have many more social programs, and better health care systems than the Americans. How do we define well-being?
Here’s how I explain that the US economy is indeed in a recession..
I’m assuming the figure of GDP that is published is actually the total market value in real terms.. ie. adjusted for inflation.. However, I am very skeptical of the published inflation figures.. They say that inflation is somewhere between 2-3%.. However, articles arguing that this figure is highly deceptive (because they are disproportionate and the goods measured are blatently changed according to what’s most convenient) are ubiquitous, so I won’t reinvent the wheel.. Also, I’m confident that many people feel that there’s no way their cost of living has only increased 2-3% over last year.. So, if inflation is really running at say 5% (and I’m being conservative.. some people would estimate it to be running at 10%, especially in the US), that would throw off the GDP numbers by 2-3%.. So, the reported fourth quarter grow of 0.6% is actually -2.4 to -1.4%..
And that’s how the economists know that the US is already in a recession..
Very nice article and nice comment from Adil. Using GDP per person is a much better way of determining the health of an economy. It at least tells us the average income of everyone in that economy.
I think most of the world would agree with Adil. I’m an American living in Australia/New Zealand and the situation in the US is affecting everyone in the world. Nobody seems better off.
A correspondent working for the US Dept of Agriculture brings strange tidings about government solvency.
“I’m writing you this email to tell you something which I find pretty disturbing. USDA is the second largest federal office building in D.C. It is massive, with hallways that stretch for three city blocks on seven floors, and one block the other way on each floor. For the last few months, every other overhead light in the halls has had their bulbs removed. Sometimes, two lights in a row are dark. It’s bright enough to walk down, no doubt, but still noticeably darker. Moreoever, each floor has two banks of elevators at each end, with three elevators per bank. For the last few months, one elevator at each bank has been put out of commission. Further, employees are now forbidden from putting space heaters in their offices, which many have done because the heating in the building has been turned down to a level where even I, a descendant of hardy Russian peasants, feel cold.
“What does this tell me? It tells me that the government of the United States of America is having difficulty paying its utility bills. Think about that. Federal offices cannot keep all the lights on, or keep the heat sufficiently high. (We’ll see what the air conditioning is like in a few months, when D.C. turns into a humid swamp). This is what one expects of Third World governments, not the USA.”
Hey guys, sorry for the delay in responding. Work and deliverables and life is happening.
In any case, about the post - I’m just opening my eyes to what the mass media is spoon feeding us relaying the information. Great comments from all.
Adil, if you don’t want to start a blog, you’re welcome to guest post here
And Frank, some would say they are conserving energy and being green
Mariam, thanks for the offer.. Maybe I’ll take you up on it one day..
The cost of living is certainly depressing! It seems each time I go to the grocery store the cereal boxes and other items have once again shrunk in size yet they sport a higher price tag! Corporations keep passing their higher taxation to the end user - us as consumers. So on lives the shrinking cereal box with a higher sticker price!