If Our GDP Increases, Isn’t It Always Good for Our Economy?  

by
January 6, 2011

An increase in our GDP is usually a good sign for our economy, but not always. Our GDP, Gross Domestic Product, is how we measure the value of all goods and services produced in our economy. It includes wages earned by American workers, including bonuses.

But, even positive economic news, such as an improving GDP can be somewhat misleading at times.

Suppose 400 workers, earning $25,000 each per year working for a clothing manufacturer, lost their jobs when the factory closed and moved to China. And these 400 unemployed American workers did not work for an entire year. Our economy would show a loss of $10 million (400 x $25,000 = $10 million) in GDP.

But, during the same year, one Wall Street trader receives an extra $12 million as an annual bonus, then our GDP would show a net increase of $2 million ($12 million – 10 million) for the year. The news media could then report that our economy was improving, since our GDP showed an increase of $2 million for the year, even though our unemployment rate may have increased.

This example of the fired 400 workers and the Wall Street trader shows how flawed our method of measuring our economic well-being by using GDP can be. I think that most people would agree that our economy did not improve during the year, even though our economy showed an increase in our GDP of $2 million.

What our economy really lost was the productive activity of 400 American workers producing clothes for us. And one wealthy Wall Street trader, trading paper and creating huge profits with well-timed trades of various financial instruments, may not produce anything of real value for the economy, even though our GDP will increase by $2 million.

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