What Gross Domestic Product Does - and Doesn't - Mean in a Recession

Article excerpt

Why a Downturn Economy Can Make You (Seem) Rich. By Jurgen Brauer

The entire globe, everyone knows, is in an economic recession. But few people really understand what that means.

In light of the media barrage and political attention devoted to the recession, this latter declaration may seem surprising. But it's true. And if policy measures are based on an ill-understood meaning of the recession, the danger is that things may be made worse, not better.

What is the bottom line anyway?

The street definition of a recession - which will do just fine here - is two consecutive quarters of falling gross domestic product (GDP).

GDP purports to measure the dollar value of all goods and services produced in an economy during a certain time period. (In practice, in the United States, GDP is measured quarterly but reported on as an annualized number.) Production implies earnings. But because one cannot earn what someone else has not spent, GDP also can be measured by adding up all expenditure streams during the same period.

Focusing on GDP alone as an indicator of well-being is misguided. Why? Look at retirees, for example. They know that income isn't the sole measure of happiness. With retirement, their earned income falls but leisure and pleasure can increase. Some money is necessary, but it is not sufficient for living a good life.

Yet GDP has become the modern politician's Holy Grail: deliver growth, and you get (re)elected; deliver recession, and you are shoved out the electoral door.

Get ahead by losing out

Along these same lines, here is an example of how a country may get richer even when GDP falls. Suppose country X has a population of 100 and a GDP of $100. The average income per person comes to $1 per person. Next, suppose the population declines by 10% from 1 00 people to 90 people and the economy declines by 5% from $100 to $95. Technically, the economy is in recession because it lost $5.

But when 90 people share $95 of income, each gets $1 .06, a 6% gain per person.

Some countries, such as Russia, do in fact have declining populations (more people die than are born), so that even with no economic growth whatsoever they can, paradoxically, still grow richer on a per capita basis.

It follows, then, that policymakers and media outlets should talk about GDP in per capita terms. Regrettably, they do not and may, therefore, unwittingly pursue policies of excess rather than policies of moderation. …