Is the economy really twice as large as we thought?

Since the mid-20th century, economists, governments, businesses, and just about everyone else has used gross domestic product (GDP) to measure the size of the economy. But is it thebest metric for the job? Some economists are saying no.

GDP is a measure of the level of spending on finished goods in the economy. It is a measure of final production. If a pencil sells for 50 cents, it increases GDP by 50 cents. But a good deal more spending tends to occur in the process of making a pencil. At the very least, the manufacturer has to acquire resources to make the pencil — someone must harvest the wood, someone must harvest the rubber, someone must mine the graphite. Under GDP, that spending is not directly included. It is only counted implicitly when the finished pencil is produced and purchased by a consumer or business.

Some economists, such as Chapman University’s Mark Skousen, argue that the intermediate stages of production lower down the production chain should also be included in measurements of output. While they recognize that including them again explicitly can mean double counting or triple counting, they argue that there are “several reasons why double counting should not be ignored and is actually a necessary feature to understanding the overall economy.” After all, lots of businesses deal solely in intermediate goods. Intermediate producers buy partial products, add a “bell and a whistle,” and pass them on. At Forbes, Skousen argues that “no company can operate or expand on the basis of value added or profits only. They must raise the capital necessary to cover the gross expenses of the company — wages and salaries, rents, interest, capital tools and equipment, supplies, and goods-in-process.” To Skousen that means that a measurement of output should take all this spending into account.

Perhaps taking heed of some of these arguments, the Bureau of Economic Analysis starting on April 25 will release each quarter a measure called gross output that includes total sales from the production of raw materials through intermediate producers to final wholesale and retail trade.