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The days of Gross Domestic Product being the dominant economic indicator are coming to a close. On Friday, the Bureau of Economic Analysis (BEA) released a new measure of economic activity every quarter called Gross Output, or GO.
GO is a measure of economic output intended to capture the value created in the economy throughout the production process, from raw materials, through to production, distribution, and consumption. On the other hand, GDP, the traditional measure for economic output, measures the final consumption or market value of economic activity.
Nobel laureate Wassily Leontief pioneered the concept of GO in the mid-20th century, but his work remained largely ignored until economist Mark Skousen took up the cause in the early 1990s. In the time since, his work has provided ample evidence to show that GO is not only an important measure of economic health, but that it serves a different and complimentary purpose to GDP.
As Skousen put it at Forbes, “GO is a measure of the ‘make’ economy, while GDP represents the ‘use’ economy. Both are essential to understanding how the economy works.… [The] GO is [also] significantly more sensitive to the business cycle” — as is visible in the diagram.
The deference of the new statistic towards production, rather than consumption, matters in so far as the public conversation surrounding GDP often focuses on ways to prop up consumption every time it falls. This manifests itself as calls for greater government spending.
Shousen counters that “consumption is the effect, not the cause, of prosperity.”
The new metric, of course, is not without controversy. Skousen notes that one common criticism has been that GO does not measure either wholesale or retail sales. Both are notable segments of the economy, but there is methodological disagreement over how to measure the value they add to the economy. Skousen has gone so far as to create a measure that includes both into GO figures, Gross Domestic Expenditures, or GDE.
In any case, we have a new gauge of economic activity — another tool as we seek to better measure prosperity and the impact of particular policies.
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