Chloe Benson
Nicole Waldron
ECON 302
February 15th, 2022
Topic: Issues in Measuring Real GDP
During our first class meeting of the semester, we discussed one of the most prevalent and important topics in macroeconomics, gross domestic product. GDP is one of the main measurements used to compare economic standing across different countries. The large drivers in economic growth that matter in the comparison of economies across countries include output, employment rate, inflation rate, interest rates, and productivity of the workforce. However, the most prominent measure we use is GDP even though the forecasts and predictions of GDP can often be misjudged due to not considering the impacts of other measurements. As we have seen in the last few years there have been many drastic changes and fluctuations in the economy and our markets are making an effort to rebound from the negative impacts of Covid and return to a time of economic growth and strong GDP. In order to be able to calculate GDP and have an accurate prediction for 2022 economists need to look beyond the standard calculation and also take into account other variables, one of them being inflation. In class, we discussed the three main ways of calculating GDP yet they all represent only the pure statistics of productivity and our goods and services. However, inflation rates and unemployment have a huge impact on the data inputs as well and can create major discrepancies in predictions if these rates change. These methods include the sum of final goods and services, the sum of value-added, and the sum of incomes in the economy. While objectively these methods of calculating GDP are efficient, failing to consider the effects of outside influences while forecasting can lead to difficulties in calculating GDP.
Problems in measuring real GDP include the need to weight goods and services to ensure that items count for the correct percentage of GDP, as some goods and services are worth significantly more than others (Blanchard, p25). Furthermore, determining the weights as well as how they need to change over time adds to the complexity of calculating real GDP. This work is necessary as GDP is seen as a highly helpful tool for analyzing economies. However, some wonder if utilizing real GDP for comparisons might have outlived its usefulness. James Sweeney, in the Journal of Applied Corporate Finance, argues for Rethinking Macro Measurement in light of the COVID-19 pandemic and technological advancements. Sweeney discusses the shortcomings of using GDP, the main complaint being that GDP measurements do not delve deep enough into what is truly occurring within economies. This argument can be supported by our textbook, as it discusses the utilization of GDP in chained (2009) dollars (Blanchard, p25). While in 2009 real and nominal GDP equaled one another, Sweeney questions “whether a [GDP] statistic is an accurate measure of what it purports to measure,” calling into question the usefulness of the 2009 weights in calculating real GDP (p8). The proposed use of GDP is to keep it as a base measurement, but utilize technologically curated data to improve upon the accuracy of the measurement as well as allow for more accurate inferences to be drawn from the data. Within the textbook there are multiple mentions of accuracy issues in calculating real GDP, supporting Sweeney’s idea. Furthermore, Kliesen’s article discusses the uncertainty of inflation which affects real GDP. This uncertainty, especially during a pandemic, demonstrates the usefulness of other measures in comparing and contrasting economies against each other or prior years.
After experiencing the drastic effects that COVID 19 has had in global economies over the last couple of years, the US economy experienced rapid growth and increases in productivity at the beginning of 2021 which only began to slow when entering into the third quarter of 2021. However, accompanying the rebound in economic growth were high inflation rates, predicted to be the highest in 30 or more years (Federal Reserve Bank). The US is expected to report strong growth in GDP in 2022, but if the high rates of inflation continue to persist and decrease household purchasing power, economic growth could be at risk. The impacts of COVID 19 included large disruptions to the product and labor markets, which are now making a comeback, and the market conditions suggest the fourth quarter will be the strongest since 1983 and expect this trend to continue into 2022 (Federal Reserve Bank). GDP growth will have positive impacts on the labor markets and currently, there is a large demand for labor which will lower unemployment by three and three and a half percent by the end of 2022. Unemployment rates and the number of people actively seeking employment are at record low numbers relative to the number of job openings which is leading to a rise in employee compensation. With shortages in labor and materials along with supply disruptions, the volume of consumer demand for goods and services is becoming hard to meet across a variety of industries globally. These factors have led to raised input costs, unit labor, and non-labor costs, yet due to the high demand producers have been able to counteract these changes by substantially raising their prices at a shocking level. The rise in employee wages is helping mitigate the rise in prices and reduction in household purchasing power, but if this continues consumers will need to reduce real spending or increase their savings. Both of these actions pose major threats to consumer spending which will, in turn, halt economic growth and decrease GDP. With all of these factors creating the rise in inflation rates, the continual growth of GDP is at risk and the forecasts and trends that have suggested strong reports in the fourth quarter and into 2022 could be inaccurate or rapidly decreasing.
The graph below shows the predictions for the main economic measures over the next few years and a forecast for long term growth. For the last quarter of 2021 and into 2022 there is a very high GDP percentage change that correlates to a high inflationary change as well. If inflation is changing at a rate that is faster than what the market can adjust for it could lead to GDP slowing and not growing as quickly as purchasing power decreases in relation to the final price of goods and services prices increases. When forecasting economists tend to look at these categories separately but using them all to create a holistic forecast considering a variety of angles and factors could result in more accurate predictions of the economic market indicators and allow for businesses and consumers to prepare for the market climate. It's important to realize the chain reaction that occurs within the market when input prices, labor shortages, or supply disruptions occur, and the effect that will have on the macroeconomic analysis tools such as GDP, inflation, and unemployment. When measuring GDP, one small change in the market can cause a ripple effect that economists and businesses can't anticipate. These ripples are always occurring and may not be detected which can create difficulties when attempting to measure GDP and why it might not be an accurate indicator of economic growth and the market conditions.
Sources Cited:
Blanchard, O. J. (2017). Macroeconomics. Pearson.
Federal Reserve Bank of St. Louis. (2022, January 13). Inflation remains wild card in U.S. GDP outlook for 2022: St. Louis Fed. Saint Louis Fed Eagle. Retrieved February 15, 2022, from https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2021/inflation-wild-card-us-gdp-outlook-2022
Sweeney, J. (2020). Rethinking Macro Measurement. Journal of Applied Corporate Finance, 32(1). https://doi.org/10.1111/jacf.v32.1
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