Economic Health Shouldn't Be Measured By GDP

The outlook of Gross Domestic Product of the United States in 2011 has been downgraded to just a few percent. News reports often cite the GDP to explain the health of the economy. Economic growth, however, is far too complicated for one number to measure. The GDP is simply outdated. Source of article – Why GDP is not the best measure of economic growth by MoneyBlogNewz.

Information on the Gross Domestic Product

The GDP is a single number that encompasses the entire value of goods and services produced in one country. The GDP has been used in several ways although the standard of living measurement was its original purpose. When adding private consumption, gross investment, government spending and exports and subtracting the gross amount imported, GDP can be found. Congress was given a report of Gross Domestic Product in 1934 for the first time. Simon Kuznets put it together. Decisions were made by the Federal Reserve on this. That is what the GDP was good for.

The information measured by the GDP

Since it was first created, the measure of Gross Domestic Product has had limitations. The number is adjusted for inflation by the Bureau of Economic Analysis. This is the “real” GDP number released. The adjustment keeps the Gross Domestic Product looking better. It would appear to grow with inflation otherwise. There is no effect on the Gross Domestic Product based n the Consumer Price Index which is a way of measuring household goods inflation or deflation. There could be an increase of Gross Domestic Product with a 400 percent increase in household items costs. This is despite the disposable income Americans have being decreased.

GDP acts like a credit card

There is one huge limitation that the Gross Domestic Product has. It can’t take negative numbers into account. To translate the Gross Domestic Product in terms of a household budget, it would be as if you measured the health of your household finances depending on how much money you spent — both in cash and on your charge cards. The repayment on those cards that would eventually come due, the damage to your spending budget and the possibility you wouldn't make your mortgage payment are all left on the cutting room floor. Measuring the economic progress of the United States — or any country — based solely on GDP is too simplistic to be accurate.

Information from

The Money Alert
themoneyalert.com/GDP.html

Blogging Stocks
bloggingstocks.com/2010/09/10/economists-lower-2011-u-s-gdp-growth-forecasts-to-2-5/

Investopedia
investopedia.com/study-guide/cfa-exam/level-1/macroeconomics/cfa3.asp