When it comes to assessing the state of the economy, gross domestic product has long been viewed by many as something close to gospel. But the government will soon begin reporting a new metric — Gross Output– that some say will shed new, important light on the economy.
“While GDP is a good measure of national economic performance, it has a major flaw: In limiting itself to final output, GDP largely ignores or downplays the ‘make’ economy, that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services,” Mark Skousen, who has long advocated for a different way to measure the economy than GDP, writes in Forbes. “This narrow focus of GDP has created much mischief in the media, government policy, and boardroom decision-making.”
Skousen says his research has found many benefits of the Gross Output metric. “First, Gross Output provides a more accurate picture of what drives the economy,” he says. “Using GO as a more comprehensive measure of economic activity, spending by consumers turns out to represent around 40% of total yearly sales, not 70% as commonly reported. Spending by business (private investment plus intermediate inputs) is substantially bigger, representing over 50% of economic activity. That’s more consistent with economic growth theory, which emphasizes productive saving and investment in technology on the producer side as the drivers of economic growth. Consumer spending is largely the effect, not the cause, of prosperity.”
Skousen also talks about another economic measure, Gross Domestic Expenditures, which “includes gross sales at the wholesale and retail level and is therefore significantly larger” than GDP. In the end, Skousen doesn’t see the new metrics as a replacement for GDP, but instead as a complement to it.