Governments around the world measure economic strength based on the combination of a number of factors. One of the factors we use in this country is known as the Gross Domestic Product (GDP). Some say that GDP is a very reliable measure because it gauges the market value of U.S. productivity. Others say it is marginally useful due to its inherent weaknesses.
Defined literally, GDP is the monetary value of all goods and services produced in a specific country during a defined period. In the U.S., GDP is typically measured in 12-month increments. GDP accounts for all economic activity produced by both the public and private sectors.
Strength of GDP Measurement
GDP is used as an economic indicator based on the assumption that productivity equals economic health. In other words, if the U.S. is producing a greater volume of goods and services, that greater production equates to positive economic benefit. It is almost like a beehive. A productive hive is generally considered a healthy hive under normal circumstances. Any beekeeper would be thrilled to open a hive and find it full of honey. Comparing GDP to raw production is the strength of this measurement.
Weakness of GDP Measurement
GDP is a poor measurement if it is used to imply a certain standard of living. Why? Because it does not account for what is known as the ‘underground economy’ — i.e., the goods and services produced for individual use or private transactions. This production typically goes unreported because it is not counted as normal business activity.
Critics of the GDP measurement make the point that the existence of the underground economy proves GDP is an unreliable measurement of individual wealth or standard of living. Simultaneously, it is also possible that an economy could be experiencing high levels of production without any increase in standard of living, usually as a result of inflation.
As you can see, GDP can be either a strong or a weak indicator depending on how it is used. One thing we know: the Government will keep measuring it.
