“Is GDP a reliable indicator of economic growth?” This is a common question in economics. The answer is complicated and depends on who you ask. If you ask a leading economic researcher, the answer is that it depends on how you ask the question. However, if you asked another economist who bases his/her views of economic performance on gross domestic product instead of income growth, the answer might be different.
Some people argue that economic indicators such as GDP are useful because they provide a way to tell if things are going well or poorly. They can give a fairly accurate indication of whether the economy is growing or contracting. The problem is that these indicators are considered self-relevant by those whose opinion they are being paid to provide. These people may not see the obvious connection between GDP growth and economic health. GDP can be viewed from a different perspective, one in which it is seen merely as an indicator of economic growth.
There are many people in the world who argue that measuring economic performance based on gross domestic product is a poor way to judge the health of a country. These economists point out that other indicators that are considered better, such as consumer spending, durable goods sales, and inflation should also be measured against GDP. Is GDP a good indicator of economic health? In the short run, it might be, but in the long run, it has proven that it is an ineffective measure of economic performance.
In the United States, we have been led to believe that GDP is the single best measure of economic performance. Many leading economists argue that the measures of growth in GDP are too aggregate and do not provide an accurate depiction of long-term trends. Other economic indicators, which are widely used around the world, provide more accurate guidance about overall economic performance. For example, Purchasing Managers Index (PMI) indicates that the price level for a particular item reflects overall demand in the economy. Consumer Price Index (CPI) tracks the cost of certain common goods and is an ideal measure of inflation.
More importantly, who are we judging? The International Monetary Fund and the World Bank both use economic indicators to determine the state of the economy around the globe. International comparisons of GDP highlight the rapid fluctuations of countries' fortunes, but they do not offer the same insights into the characteristics of individual economies. GDP pertains only to economic activity within a country; it does not tell us how other economies perform. If anything, these indicators fail to show how different economies are performing compared to each other.
Whether it is a good indicator or not, the question remains: “Is GDP as an indicator of economic growth?” This question should not be answered with an unyielding “No.” Economic . . . . . . indicators serve as great information providers, allowing people to better understand how different countries are progressing economically. And it is this insight that helps us come up with practical policies, such as those which are designed to support economic growth.