What Are the Best Measurements of Economic Growth?

Economists and statisticians use several methods to track economic growth, with the most well-known being gross domestic product (GDP).

However, some economists have highlighted limitations and biases for GDP. Organizations such as the Bureau of Labor Statistics (BLS) and the Organization for Economic Co-operation and Development (OECD) also keep relative productivity metrics to gauge economic potential. Some experts have suggested measuring economic growth through increases in standards of living, although this can be tricky to quantify.

Gross Domestic Product

Gross domestic product (GDP) is the most common measure of economic growth. This is because GDP—which measures the value of goods and services produced within a country—is often used proxy for monetary expenditures. If a statistician wants to understand the productive output of the steel industry, for example, he needs only to track the dollar value of all of the steel that entered the market during a specific period. Combine the outputs of all industries measured in terms of dollars spent or invested, and you get total production.

However, this does not actually measure relative productivity. The productive capacity of an economy does not grow because more dollars move around, an economy becomes more productive because resources are used more efficiently. In other words, economic growth needs to somehow measure the relationship between total resource inputs and total economic outputs.

The OECD has described GDP as suffering from a number of statistical problems. Its solution was to use GDP to measure aggregate expenditures, which theoretically approximates the contributions of labor and output, and to use multi-factor productivity (MFP) to show the contribution of technical and organizational innovation.

Gross National Product

Gross national product (GNP) is another economic indicator used to measure growth. Economists use GNP mainly to learn about the total income of a country's citizens within a given period and how the residents use their income. GNP measures the total income accruing to the population over a specified amount of time. Unlike gross domestic product, it does not take into account income accruing to non-residents within that country’s territory; like GDP, it is only a measure of productivity, and it is not intended to be used as a measure of the welfare or happiness of a country.

The Bureau of Economic Analysis (BEA) used GNP as the primary indicator of US economic health until 1991. In 1991, the BEA began using GDP, which was already being used by the majority of other countries. The BEA cited an easier comparison of the United States with other economies as a primary reason for the change. Although the BEA no longer relies on GNP to monitor the performance of the US economy, it still provides GNP figures, which it finds useful for analyzing the income of US residents.

There is little difference between GDP and GNP for the US, but the two measures can differ significantly for some economies. For example, an economy that contained a high proportion of foreign-owned factories would have a higher GDP than GNP. The income of the factories would be included in GDP as it is produced within domestic borders. However, it would not be included in GNP since it accrues to non-residents. Comparing GDP and GNP is a useful way of comparing income produced in the country and income flowing to its residents.

Productivity vs. Spending

The relationship between production and spending is a quintessential chicken-and-egg debate in economics. Most economists agree that total spending, adjusted for inflation, is a byproduct of productive output. They disagree, however, if increased spending is an indication of growth.

Consider the following scenario: In a given year, say that the average American works 44 productive hours a week. Then, in the same year, Congress passes a law requiring all workers to work 50 hours a week. The GDP in the future will most likely be greater. But does this constitute real economic growth?

Some would certainly say yes. After all, total output is what matters to those who focus on expenditures. For those who care about productive efficiency and the standard of living, this question does not have a clear answer. On the other hand, the law to increase hours worked requires the average worker to give up six hours per week of leisure. To bring it back to the OECD model, GDP would be higher, MFP would be unchanged, but if the loss in leisure was not worth the incremental six hours of wages, then the standard of living may have declined even though GDP has risen.

The Bottom Line

Gross domestic product is the most widely used measure of economic growth. However, the indicator comes with limitations, including its inability measure relative productivity. Other widely used measures include gross national product, inflation, and employment rates.