Issue Overview: GDP

By Bloomberg, adapted by Newsela sta on 09.21.16

Word Count 752
Level 1120L

TOP: Map of U.S. states by GDP per capita in U.S. dollars (2012 gures). Courtesy of Wikimedia Commons. BOTTOM:
Graphics courtesy of Bloomberg.

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 There are many dierent

economic indicators that determine whether an economy is doing well or poorly, but gross
domestic product (GDP) is special. By denition, GDP is simply the market value of all goods
and services produced in a given period of time. But its often used as a measuring stick for a
countrys well-being.

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GDP can move markets, aect elections, shape interest rate policies from a nation's central
bank and sway business decisions. It has its critics. Some think it doesnt measure enough,
while others think it measures too much or measures the wrong things. Some think a single-
minded focus on GDP has warped markets and public policy. Others think it does what it does
just ne.

The Situation

GDP numbers inuence economic and political debates worldwide. In the U.S., investors
anxiously watch GDP reports. They are looking for hints about when the U.S. central bank, the
Federal Reserve, might raise interest rates. In China, the governments preoccupation with
GDP may be fueling nancial and social instability. In Japan, shrinking GDP has been part of
the prime ministers reasoning for taking drastic measures to help the economy.

Politicians highlight GDP when things are going well and use it to argue for dierent policies
and ideas when it's low. Economists often express other factors such as debt and
government spending as a percentage of GDP. This allows them to compare the value of
goods and services produced with the amount of money a country has spent or owes. Budget
analysts take GDP into account when making their predictions.

Questions about the reliability of Chinas GDP reporting have sent investors looking for other
measures of economic performance. A country's steel production and car sales have been
considered. Meanwhile, Indias novel method of calculating growth has left economists
bewildered.

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The Background

The English economist William Petty made the rst systematic attempt to calculate national
income and spending in 1665. In later years, theorists from Adam Smith to John Maynard
Keynes oered their own variations.

The modern version of GDP dates back to the Great Depression. During this period of
nancial decline and stagnation, U.S. presidents struggled to understand how the economy
was doing based on inexact measurements such as railroad shipments and the stock market.
The economist Simon Kuznets devised a system of national income accounts that was
presented to the U.S. Congress in 1937. The rst estimate of what was then called gross
national product followed in 1942.

Most countries now tally GDP using information on consumer spending, government
spending, investment in business and net exports, which are the dierence between the value
of goods sold to other countries and goods purchased from other countries. In the U.S., the

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Bureau of Economic Analysis uses about 10,000 data streams to produce its GDP estimate.
This estimate is expressed as a rate of growth, in terms of the percentage by which the GDP
rose or fell since the last calculation. The estimate is always subject to revision.

The Argument

Critics of GDP tend to agree with Robert F. Kennedys unforgettable line from a 1968
presidential campaign speech; he said that GDP measures everything except that which
makes life worthwhile. It doesnt directly measure health, happiness, leisure or equality. To be
fair, it was never meant to.

Kuznets himself warned that GDP wouldnt be a great indicator of social progress. A dollar
spent building a prison counts the same as a dollar spent building a school. This has led to
proposals for alternative measures of a country's wellness and success, with names like the
Genuine Progress Indicator and Gross National Happiness.

Others argue that the single-minded pursuit of GDP growth has led politicians to ignore
environmental problems, encourage nancial risk and accept widening income inequality.

Arguably, GDP also has technical shortcomings. It doesnt accurately track intangible goods,
like digital downloads and mobile apps, or the informal economy, which includes the sale of
goods and services directly between consumers. Natural resources like water and forests
dont count toward GDP but depleting them does. Much of the digital economy, like Google
and Facebook, is free to use, so it barely shows up in GDP. And the slow pace at which GDP
data is collected is becoming a bigger problem in measuring a fast-changing economy.

Many economists would still agree with Paul Samuelson and William Nordhaus, the authors of
a famous textbook on the topic. They ranked GDP among the great inventions of the 20th
century. Whether its suitable to the 21st is perhaps a harder question.

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Quiz

1 Read the paragraph below from the section "The Situation."

Politicians highlight GDP when things are going well and use it to
argue for dierent policies and ideas when it's low. Economists often
express other factors such as debt and government spending as
a percentage of GDP. This allows them to compare the value of goods
and services produced with the amount of money a country has spent
or owes. Budget analysts take GDP into account when making their
predictions.

How does the paragraph help develop a central idea of the article?

(A) by illustrating the importance of GDP to economic and political discussions

(B) by indicating that predictions based on GDP are more accurate than using
other data

(C) by showing that GDP is no longer a factor in making budget predictions

(D) by suggesting that GDP is no longer the primary measurement of an economy

2 Which of these sentences from the article would be MOST important to include in an objective
summary of the article?

(A) Some think a single-minded focus on GDP has warped markets and public
policy.

(B) In Japan, shrinking GDP has been part of the prime ministers reasoning for
taking drastic measures to help the economy.

(C) Most countries now tally GDP using information on consumer spending,
government spending, investment in business and net exports, which are the
dierence between the value of goods sold to other countries and goods
purchased from other countries.

(D) Critics of GDP tend to agree with Robert F. Kennedys unforgettable line from a
1968 presidential campaign speech; he said that GDP measures everything
except that which makes life worthwhile.

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3 Look at the graph labeled "GDPs in Recession and Recovery." Which statement from the article
BEST explains the information in the graph?

(A) GDP can move markets, aect elections, shape interest rate policies from a
nation's central bank and sway business decisions.

(B) In China, the governments preoccupation with GDP may be fueling nancial
and social instability.

(C) This estimate is expressed as a rate of growth, in terms of the percentage by

which the GDP rose or fell since the last calculation.

(D) Much of the digital economy, like Google and Facebook, is free to use, so it
barely shows up in GDP.

4 Look at the map above the article. Which of the following is emphasized by the map, but NOT by
the article?

(A) Some people have begun to think that GDP measures the wrong things.

(B) A country's GDP can vary widely within the country itself.

(C) U.S. investors use GDP to guess when interest rates may rise.

(D) The estimate of the GDP is expressed in a percentage of growth.

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