Why GDP Doesn’t Work #
This week’s Economist makes the argument that total GDP, which is usually used for measures of growth from country to country doesn’t work very well. Because it ignores the direction of population size, it distorts the picture in favor of growing countries — and misses the fact that the US is already in a recession.
Once you accept that growth in GDP per head is the best way to measure economic performance, the standard definition of a recession—a decline in real GDP over some period (eg, two consecutive quarters or year on year)—also seems flawed. For example, zero GDP growth in Japan, where the population is declining, would still leave the average citizen better off. But in America, the average person would be worse off. A better definition of recession, surely, is a fall in average income per person. On this basis, America has been in recession since the fourth quarter of last year when its GDP rose by an annualised 0.6%, implying that real income per head fell by 0.4%.