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Macroeconomics concerns itself with large-scale activities such as employment, aggregate supply and demand, and employee productivity, among other things. Gross domestic product (GDP) is a metric that defines the market value for all goods produced by a country. Advantages of GDP are many, with some of the more important ones being a way to define the business cycle, the ability to understand shifts in a country’s economy, and a measurement for competitiveness in a global environment. Not all economists are in agreement with the use of GDP as a main economic measurement tool. A clear understanding of the advantages and potential drawbacks help one best use the GDP.
The business cycle helps economists understand whether an economy is growing, contracting, or remaining stable. GDP is the tool that most often represents aggregate growth and contraction in an economy. Classically defined, two consecutive quarters of GDP increases represent economic growth, while two consecutive quarters of decreasing GDP indicate contraction. Here, the advantages of GDP are clear. Without an overall metric for defining growth and contraction, economists could not define differences between the two.
GDP consists of three major groups: consumer spending, investment by businesses, and government spending, or CIG. Over time, a country may experience somewhat stable percentages of CIG in its overall GDP. Shifts occur, however, when the percentages change amongst themselves. For example, consumer spending may go down, but government spending increases in hopes that the economy does not enter a contraction period. Economists see advantages of GDP here because a trend may occur where economists can track movements in overall GDP changes.
Competition among nations continues to increase in the current global economic environment. It can be difficult to ascertain which countries are doing well economically and which are not at certain times. Advantages of GDP include the ability for economists to compare one country’s figures to another. Additionally, the CIG percentages also allow for a competitive measurement. Either way, economists have the tools necessary through GDP figures to assess the strength of nations and the global economy.
Like any measurement tool, GDP is not without its faults. It is possible for a country to manipulate its figures. For example, a country may provide GDP estimates that outpace actual GDP. Economists then need to spend more time to discover the actual figures for a given time period. Manipulation also occurs when a country attempts to count items in GDP that should not be there or double count items improperly.
@Mammmood - That’s a good point. However, from my observation, GDP is not often skewed in a way that belies that meaning of the numbers.
I find charts to be very useful in this regard. You can see how the GDP growth is trending over time, and the moment that it starts trending downward – especially if it’s two consecutive quarters – you know that you’ve entered a recession.
During this time the pundits like to pontificate on why businesses aren’t spending, or consumers aren’t buying or why no one is responding to government stimulus. It’s like a chicken and egg game.
The good news is that economies eventually do recover, at least from what I’ve seen. Whether the GDP figures reflect the recovery right away or take a quarter or two to show the change is another matter.
But I do agree with you that it’s important to look beneath the headlines to really know what’s going on.
I think the article brings out a good point when it mentions factors which could skew GDP. If the government spends a whole lot of money to stimulate the economy, and yet businesses invest little and consumers spend little, it may very well be that the GDP can still show a sizable upward trend based on the government expenditures.
This would especially be the case if the stimulus spending by the government was quite significant. That’s why I think it’s important that when economic news is released, people shouldn’t be so quick to react on the raw numbers themselves, whether you are talking about GDP or employment numbers or what have you.
It’s important to drill down into the raw numbers to see what the underlying fundamentals are. That will give you an accurate picture of the state of the economy.