Thursday, April 03, 2008

Thinking About GDP

Although the BigPicture's author is decidedly lefty, it's worth the read--not least because he forces one to re-think stuff.

Here he discovers a parsing of GDP which 'splains a lot, and it comes under the "Doh!! Why didn't I think of that?" category.

Quoting Merrill Lynch North American Chief Economist David Rosenberg:

"We are amazed that everyone quibbles about whether real GDP growth will be fractionally positive or negative this quarter. The population is growing in a 1.0-1.5% band annually, so anything less than that on real GDP means that real per capita income is contracting.

That is the way any country’s standard-of-living is determined. And as we saw in the final 4Q revision, real GDP growth may have stayed at +0.6% at an annual rate, but the domestic segments of the economy – strip out foreign trade – actually declined at a 0.4% annual rate. This is roughly the same modestly negative trend in what is referred to as gross domestic purchases that occurred in the first quarter of recession back in 1Q2001 and 3Q1990."

He marshalls an example from The Economist.

"Which economy has enjoyed the best economic performance over the past five years: America's or Japan's? Most people will pick America. ... it is true that America's average annual real GDP growth of 2.9% was much faster than Japan's 2.1%. However, the single best gauge of economic performance is not growth in GDP, but GDP per person, which is a rough guide to average living standards. It tells a completely different story.

GDP growth figures flatter America's relative performance, because its population is rising much faster, by 1% a year, thanks to immigration and a higher birth rate. In contrast, the number of Japanese citizens has been shrinking since 2005. Once you take account of this, Japan's GDP per head increased at an annual rate of 2.1% in the five years to 2007, slightly faster than America's 1.9% and much better than Germany's 1.4%. In other words, contrary to the popular pessimism about Japan's economy, it has actually enjoyed the biggest gain in average income among the big three rich economies...

So if it seems that your financial gears are grinding a may be true.

1 comment:

3rd Way said...

Very good points...

You better take this down before Paddy-Mac reads it. His head might explode trying to come up with a way to fit this into his we-have-the-ultimate-economy paradigm.