Chart of the Day: Income-Based GDP
An often-heard complaint about GDP is that the number reported is calculated by adding up all the money spent over some period of time, instead of the amount earned. Some economists complain that using spending to measure GDP doesn’t provide as accurate a result as using income. Justin Wolfers at Freakonomics solves this problem in a recent blog post by recalculating GDP based on income, instead of spending. The result isn’t pretty.
Here’s the ultimate chart that he arrives at, which also accounts for population changes:
If you use income instead of spending for your measuring stick, then GDP remains much lower than its pre-recession level. Indeed, it sits 3.8% below where it stood at the end of 2006.
But since calculating GDP using income makes the recession look deeper, it also makes the recovery look a little bit stronger, because the trends are very similar. By the end of the first quarter of 20111, GDP had rebounded 3.4% from its bottom hit in the second quarter of 2009. Measuring with income, however, shows 3.7% growth from trough to present, even though the level we’re at now is lower. This occurs because it fell farther if income is considered.
That’s little consolation, of course. The more important point is that the economy looks relatively worse if you measure GDP using income instead of spending. Of course, this might not come as a big surprise if you follow income trends. As we saw in April’s numbers, income has been stagnant pretty much throughout 2011.
Full story at The Atlantic Online