DAV Public School Macroeconomics GDP and GDI Article Summary

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Please read the following articles. (1) In your first post, respond with your reactions to the article and answer all the questions below. (2) In your second post, reply to at least one other post on the forum with a comment, reaction, question, follow-up article, etc. Students are also welcome to respond to those commenting on their posts.

See the rubric below for how posts are evaluated — note quality does not mean quantity! (e.g. posts should be long enough to completely answer all parts of the prompt; this will vary depending on the post)

https://home.treasury.gov/news/featured-stories/measuring-the-strength-of-the-recovery

https://www.federalreserve.gov/newsevents/speech/waller20220714a.htm

In lecture, we discussed different measures of aggregate economic activity including the level of gross domestic product, or GDP, and GDP growth. There is however another measure of economic activity receiving much attention called gross domestic income, or GDI. Both real GDP and real GDI measure the real output of the U.S. economy: while GDP measures aggregate spending on good and services provided to final users (households, government, etc.), GDI measures aggregate income (wages, business profits, rental and interest income). In lecture, we also learned that under some conditions, it is equivalent to think of aggregate production as the same as aggregate income. Therefore in theory, GDP should equal GDI. But due to differences in data sources used to arrive at the measures, the two measure can differ and typically do.

As the U.S. Treasury article and speech by Federal Reserve Board Governor Christopher Waller makes clear, GDP and GDI in fact have been diverging over the past 10 years, which has important implications for economic measurement and policy. For instance in the first quarter of 2022, GDP contracted 1.5%, while GDI rose 2.1%. In other words, the economy is contacting under one measure while expanding under the other measure. What is going on? To figure out what is happening and understand the implications, please read the articles above and answer the following questions in your discussion.

Be sure to relate and connect the article or replies to concepts learned in class. The following rubric is used to evaluate responses.

46-50 points: student makes at least two “high quality” posts. The first post includes a brief summary of what the student took out of the article and has complete answers to all the questions in the prompt; Subsequent posts include a thoughtful reply to at least one other first post of another student with a follow-up thought, comment, question, etc. All posts make an effort to relate and connect the article or replies to concepts learned in class.

1) Questions:

What are the advantages and disadvantages of using GDP as a measure of economic activity?

Similarly, what are the advantages and disadvantages of using GDI as a measure of economic activity?

Based on this comparison, which of the two measures do you think is a more informative indicator for assessing the health of the economy? Explain carefully.

According to the U.S. Treasury article, why does GDI suggest a more rapid recovery relative to GDP following the covid pandemic?

What implications could this choice between GDP versus GDI have on economic policy?

2) My peer’s response:

The article talks about two different measurement of aggregate economy activity, GDP and GDI. The author also introduces another new indicator GDO, released by the Council of Economic Advisers in 2015. Then the article uses the data calculated by GDP and GDI was compared to see which one is better at measuring economic output and the state of the recovery after COVID-19 pandemic, as well as what implications could this choice between GDP versus GDI have on the economy.

What are the advantages and disadvantages of using GDP as a measure of economic activity?

From the class, we learned that GDP is an imperfect measure of economic performance and well-being since it does not measure many things like household activities and illegal activities, so GDP is inaccurate. Also, GDP doesn’t count negative consequences of production such as pollution and noise. Lastly, GDP doesn’t include the country’s capital and workers abroad. However, I think GDP is simple and widely used to calculate and also gives us a clear idea about what’s going on about our economy. It can be simply calculated using the formula Y= C+I+G+X-M. Second, if the measurement errors constant over time, GDP still useful for comparing economic activity over time.

What are the advantages and disadvantages of using GDI as a measure of economic activity?

From the article, we know that GDI is a better real-time indicator of the state of the economy. During the 2008 recession, for example, GDI deteriorated earlier and more quickly than GDP, suggesting a deeper recession. In other words, GDI is more sensitive in forecasting economic changes, either a recession or a recovery. For the disadvantages, I think it may cause shock or panic in the public. As the article said, GDI deteriorated more quickly and sharply, so if we use it as the main measurement of our economy, when there’s a recession, GDI will tell the public that the recession is very severe, our economy is going to collapse therefore may cause unnecessary panic.

Based on this comparison, which of the two measures do you think is a more informative indicator for assessing the health of the economy?

Based on the comparison, I think GDI is more informative for assessing the health of the economy. Since it is very sensitive to any change happens to the economy, it can help us foresee the problem faster than GDP. Therefore, we will have more time to prepare for the problem and try to reduce the loss as much as possible.

According to the U.S. Treasury article, why does GDI suggest a more rapid recovery relative to GDP following the covid pandemic?

According to the article, GDI suggest a more rapid recovery relative to GDP following the pandemic because in the current recovery, GDI shows economic output remarkably exceeding its pre-pandemic trend: based on today’s estimate of GDI for the first quarter of 2022, output is 1.2 percent above the level that would have been expected before the pandemic. By contrast, GDP suggests that output is still 2.0 percent below pre-pandemic trend. Put another way, GDI has grown at 2.7 percent over the pandemic – higher than the average output growth between 2015 and 2019, compared with GDP which has just grown 1.2 percent.

What implications could this choice between GDP versus GDI have on economic policy?

First, as I said above, GDI suggests more rapid recovery relative to GDP. Second, the choice between GDP versus GDI carries implications for understanding trends in productivity — a key driver of wage growth and living standards over the medium term. In summary, productivity growth appears to have accelerated during the pandemic if output is measured by GDI. Based on what indicator we choose; it can have a consequential impact on the pace of productivity growth. Third, the gap between GDP and GDI has important fiscal implications. A stronger recovery in output means that the public debt burden is somewhat lower. So, the choice helps us distinguish the nation’s debt burden and the corresponding fiscal policy brought up to handle the situation.

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