Here’s why the go-to metric for assessing economic strength is far from perfect — and might need an update

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Gross domestic product has long served as the standard measurement for national economies, with its historical precedent and simplicity making it appealing to everyone from economists to investors.
However, the formula for GDP leaves out factors that are growing increasingly crucial in today’s economy.
Some experts argue the measurement is slow to account for the rapidly developing service industry, doesn’t account for sustainability, and leaves social movements in the dark.
Here are GDP’s strengths and weaknesses, as well as a few other indicators that cover some of the areas GDP ignores.
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Gross domestic product continues to serve as the go-to metric for measuring national economies. It’s cited in times of expansion and recession, and followed closely by economists around the world.

Yet a focus on maximizing GDP leaves plenty of other key factors out of the equation.

The US posted a better-than-expected GDP reading Wednesday, with 1.9% growth beating analysts’ 1.6% estimate. The figure was primarily driven by strong consumer spending as the manufacturing sector cooled.

As CEOs shift their priorities away from simple profitability and companies place greater value in sustainability, the formula for GDP ignores several critical indicators like quality-of-life shifts, environmental degradation, and purchasing power, among many others. GDP is calculated by adding a nation’s consumption, government spending, investment, and net exports.

Here are GDP’s crucial strengths and drawbacks, as well as a few other measurements that could eclipse the historical benchmark as a new measure of national progress.

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The Pros

Much of GDP’s strength comes from its historical precedent. The metric dates back to 1944, after countries attending the Bretton Woods economic conference agreed to start using it as a standardized measurement.

Even through the US was among the last major powers to prefer GDP over other measures — holding off until 1994 — the St. Louis Federal Reserve shows GDP data from as far back as 1947.

Since then, critics have occasionally called for the use of real GDP — a measurement that takes price changes into account — or metrics that place a greater focus on consumer happiness. Yet nominal GDP remains the standardized measure across the world’s largest economies.

The widespread acceptance of a single equation is another reason why GDP is so popular. For example, the US has pivoted from its manufacturing-heavy past to an economy more focused on innovation and service sectors.

Meanwhile, China expanded its economy by offering other nations cheap labor and investing in massive manufacturing facilities. Both nations have changed drastically in the last few decades, yet GDP measurements remain dependable and allowed analysts to compare the two economies as they evolved.

Finally, the single figure represented in GDP makes measuring economic power simple. While the measurement doesn’t take all economic data into account, it yields an easily-updatable list of the world’s most powerful economies and helps analysts study why some nations rapidly jump up the rankings …read more

Source:: Business Insider


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