The Gross Domestic Product, that is, the value of everything a nation produces, is pretty much overrated, according to a blogger for one of largest online investment communities.
Recently, GDP increased by an annual rate of 1.1% in the second quarter, according to the “second” estimate released by the Bureau of Economic Analysis.
This small growth led some to believe a September rate hike may not come, and others speculate that it still might. While there are many factors that the Fed considers when raising rates such as the employment report, the upcoming election and many other factors, the GDP does have its role to play.
Actually, the use of GDP as an economic indicator is a fairly recent development and is subject to change, according to this blog by financial pundit John Mauldin for Harvest Exchange.
Mauldin argues that, in fact, GDP is not a precise number, and is more of a “fuzzy reflection” of the economy, according to the article.
From the blog:
The best book on GDP that I’ve ever read is by Diane Coyle. Ms. Coyle takes us through not just the development of GDP but the problems with the concept.
There is no such entity out there as GDP in the real world, waiting to be measured by economists. It is an abstract idea…. I also ask whether GDP alone is still a good enough measure of economic performance – and conclude not. It is a measure designed for the twentieth-century economy of physical mass production, not for the modern economy of rapid innovation and intangible, increasingly digital, services. How well the economy is doing is always going to be an important part of everyday politics, and we’re going to need a better measure of “the economy” than today’s GDP.
GDP is a huge enterprise. It is full of rules… with almost as many exceptions.
The blog lays out some exceptions that make it hard to calculate the nation’s exact GDP.
From the blog:
For example, if you pay someone to mow your lawn and report wages paid, that adds to GDP. If you pay that person under the table, it doesn’t.
If you pay your maid to clean your house, it adds to GDP. Except if you marry her, then it doesn’t. Unless she gets access to the credit card, in which case, spending adds to GDP.
The sharing economy that’s on the rise with apps such as Uber and Airbnb could also cause a significant change in GDP calculations.
“Things are changing,” mortgage industry writer Rob Chrisman said in his daily newsletter. “And if everyone on the street doesn't need to buy or own their own shovel, or their own car, and the world needs to make fewer of them over time, what does that do to manufacturing-related GDP as the years pass?”
It's clear that times are changing, but can the GDP measurement keep up, will it be an increasingly outdated number, or do you think it’s still a good starting place to estimate the strength of the economy?