CHAPTER: MEASURING A NATION’S INCOME
You may have noticed that measuring an economy’s gross domestic product is not an exact science. We know, for example, that GDP omits the value of non-market activity, such as the child-care that a “stay-at-home” parent provides. One student wonders if this lack of precision calls into question the usefulness of GDP.
The data we use to study the economy are, admittedly, not exact. No economic statistic is perfect. Yet it is important that we have some way to monitor the economy’s overall performance both in the short run and in the long run. GDP is the best available measure for that purpose.
In the short run, the key issue is fluctuations in economic activity – commonly called “the business cycle.” These ups and downs in production, income, and employment affect the economic well-being of businesses, consumers, and workers.
In the long run, the key issue is growth in productivity and living standards. This long-run growth is the reason why the average person today enjoys a higher standard of living than his or her grandparents did.
Policymakers have tools they can use to try to reduce short-run fluctuations and to raise long-run living standards. But policymakers must first assess the economy’s current performance, much like a pilot needs a compass to measure the current heading before deciding whether to bear right or left.
GDP, while not exact, captures a lot of information. It simultaneously measures total income earned within a country and total spending on the country’s production of final goods and services. GDP is strongly correlated with many other measures of economic well-being.
Because it’s so important to have the best possible measure of overall performance, many economists and statisticians have worked to refine the measurement of GDP. This measure allows us to chart the economic well-being of the nation. That’s why understanding GDP is the starting point for the study of macroeconomics.