Saturday, March 31, 2012

GDP and GDI Compared

John Magee alerted me to a news story in the March 29 New York Times titled “Is the Economy Growing Faster than We Knew?” (link). It holds a chart in which growth quarter to quarter is charted for two measures. One is Gross Domestic Product, the other is Gross Domestic Income.

These two are, as it were, the economy as viewed through the right eye (GDP) and the left (GDI). The first measures expenditures, the second measures income, and since every expenditure is somebody’s income, the two number should be exactly the same. And, yes. Theoretically they are. But different data collection systems are used to collect each, they tend to diverge, sometimes a little, sometimes more. There’s many a slip twixt surveys and press releases. I thought I’d show some data on these two measures in actual dollars—rather than in percentage changes.



This first chart shows the two measures on an annual basis 1990 through 2011. This chart more or less supports the theory. The two lines virtually overlay each other. In this period we had three recessions, marked with horizontal bars. The one in 1990-1991 and in 2000 were not severe enough to show up in an annual tabulation. The one in 2007-2009 was long enough to show decline of both. Notice that in some period GDP came in slightly higher, in others GDI was higher.



In this second chart I look at the recent period, 2006-2011 and by quarter. Here the differences are more easily seen. It would appear that in “good times” GDI leads the way and GDP follows. In bad times GDP holds the lead and GDI trails. The early signal that the economy is resuming growth appears in the first quarter of 2011. In that year GDI was leading the way the entire year.

GDP’s big components are Personal Consumption Expenditures (68.4%), Government Consumption and Investment (19.0%) and Gross Domestic Investment (12.6%). These values ignore net imports and are for the 4Q 2011.

GDI’s big components are Compensation of Employees (54.8%), the Net Operating Surplus (of companies and institutions, 25.6%), Depreciation (which is handled as income, 12.9%), and Taxes on Production and Imports (7.2%).

We might surmise that GDI leads in good times because compensation must be received before expenditures are made—and income dips early in recessions. When GDP leads in expansionary times, consumption may be partly fuelled by credit. But the measures, while they might signal the economy’s mood, are ultimately equivalent. No output without input—or vice versa.

2 comments:

  1. Thanks for those graphs! Very interesting, indeed.

    GDI is also a good reminder that there are a lot more ways to measure the economy than just GDP, which is the measure that gets all the headlines. You really do need to look at a lot of different views of the economy to begin to think you have a good idea of what's really going on out there.

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    1. Too true. For a long time now I've preferred employment growth--if I absolutely had to have a single measure. GDI corresponds with employment better. Even worse than watching GDP only is to be focused on the Dow. But we're living in the Age of the Sound Byte.

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