Friday, August 27, 2010

The Silver Lining in the GDP Cloud

. Friday, August 27, 2010

As an graduate of Econ 101 can tell you, gross domestic product is calculated according to a modest identity:

GDP = Consumption + Investment + Government + Exports - Imports

This measure of a nation's well-being is attractive for its simplicity, but it lacks nuance about the state of an economy. GDP does not measure the distribution of national income, the type of production or consumption, or the circumstances under which production and consumption take place. Today's GDP report illustrates some of this:

Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which sliced off 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947.

Via Felix Salmon, who notes:

Obviously, a trade surplus would be better than a trade deficit, especially in terms of generating employment growth domestically rather than abroad. But exports did rise, at quite a healthy clip. They were just eclipsed by this whopping rise in imports — which are a sign that there’s still a lot of demand in the economy.

This is a subject which came up at the Treasury blogger meeting last week: while no one at Treasury is exactly overjoyed at seeing imports rising so much faster than exports, any sign of increased economic activity is being taken as a good sign. Certainly this kind of thing is preferable to seeing the opposite happen, where exports fall and imports fall faster. Even if that would have a better effect on GDP.

So the second quarter GDP revision looks pretty bleak -- 1.6% annualized growth rate, rather than the 2.4% that was originally reported, which itself was down from 3.7% in the first quarter -- and it certainly isn't great. But the rise in exports shows the the U.S. retains some competitiveness, and the rise in imports demonstrates the presence of consumer demand in the face of a weakened dollar.

This is also one piece of evidence that we are not in a paradox of thrift world, nor that the aggregate problem is nominal, not real. That's not proof of anything, but it is one point. It also demonstrates how important trade is for the well-being of the country, even if it has a nil or negative effect on GDP.

For some of these reasons, the French government created the Commission on the Measurement of Economic Performance and Social Progress, which included such luminaries as Joseph Stiglitz and Amartya Sen, to create a different measure. Their report is interesting, although i doubt GDP will be displaced as the most common unit of measure any time soon. GDP's benefit is its simplicity and universality, even if those attributes sacrifice some nuance in the process.


Otto said...

The investment boom in Q2 is the chief culprit behind the large negative impact from net exports. It looks as if investment growth will slow a lot in Q3 (gauging from orders & shipments data for July), implying that net exports won't be as much of a drag in Q3 - but neither will rising investment demand give much of a boost...

How much more vibrant wouldn't the economy have looked if the EUR/USD had been at 1.60 and the Chinese had revalued USD/CNY by 25-40%?

The Silver Lining in the GDP Cloud




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