Thursday, July 31, 2014

What's the difference between GDP and GDI?

John Moore

This morning we learned that GDP shrank at a 1 percent annual rate and GDI shrank at a 2.3 percent annual rate. Disturbing. And you may be even more disturbed when you learn that GDP and GDI are the exact same thing.

Weird.

The issue is that in economics there's often a difference between the economic concept you're trying to measure and the dataset that's assembled by actual human beings.

In this case, GDP stands for gross domestic product and conceptually the idea is to measure the economic value of everything produced in the United States. By contrast GDI stands for gross domestic income and conceptually the idea is to measure all the money earned by everyone US-based producer of things.

But since the economic value of producing something is defined as the money you get paid for producing it, the GDI concept is the same as the GDP concept. Check out any economics textbook and they will tell you that GDI = GDP. And it does. By definition.

And yet when the government sets about to measure GDP and GDI they are never equal.

GDP is measured by looking at all household spending, then adding all business investment, then adding all government purchases, then adding all exports sold to foreigners, then subtracting all imports purchased from foreigners.

GDI is measured by looking at all the income earned by employees, then adding all the profits earned by businesses, then adding all the taxes collected by governments, then subtracting all the subsidies paid.

In theory, these two series should add up to the same thing. In practice, data sources are always imperfect and they don't add up to the same thing. The difference is known as the statistical discrepancy. And something to note is that the data is subject to many, many, many revisions over time as more and more data comes in. These revisions tend to decrease the extent of the discrepancy over time. And in the long run, the people who put the numbers together at the Commerce Department consider the GDP series to be more authoritative. That's why GDP is a more common phrase than GDI.

But in the short run, GDI is often more accurate. So when you're looking at news about the recent state of the economy, you may want to pay more attention to GDI. When you're looking at historical information or long-term trends, GDP is probably better.

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