Why Gross Domestic Income Is a Better Barometer of the U.S. Economy

Using income as a yardstick puts a different spin on the economy.

Justin Wolfers is associate professor of business and public policy at the Wharton School of the University of Pennsylvania.

Gross domestic product is the best-known measure of the economy. But you say there's another.

SEE ALSO: Kiplinger's Economic Outlooks

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Well, there are two ways of measuring GDP, which is the value of all goods and services produced in the U.S. One way is to measure every dollar that's spent on final goods and services -- by convention, that's called GDP. The other way is to measure income in the economy, including wages, interest and profits, which is called gross domestic income, or GDI. Because every dollar spent is a dollar earned by someone else, the two are conceptually equivalent. But in reality, these alternative measures are based on somewhat different data. As a result, they don't always move together and can give very different signals.

Is GDI a better measure?

It turns out that the data we collect on income provide a more accurate indicator of the pace of economic growth than the data we collect on how much people spend -- particularly at turning points in the economy. A spectacular instance of this was the Great Recession of 2007–09. When the economy first turned down, the GDP figure showed the economy was falling, but not very quickly. GDI pointed to a severe decline in growth, which we now know was correct.

What is GDI telling you now?

GDI told me that in the middle of 2011 the economy was very close to falling back into recession. Currently, GDI is telling me the economy is stronger than generally thought. In the fourth quarter of 2011, GDI grew at a healthy 4.4% clip, compared with GDP, which grew at 3%. I feel more confident that the economy grew at a healthy pace in the first quarter of 2012 as well, even though the GDP estimate of 2.2% growth was a bit disappointing.

What's the most important indicator to watch now?

The most informative about the state of the U.S. economy is nearly always the jobs report that comes out the first Friday of each month. I religiously set my alarm so that I don't miss the 8:30 a.m. release. My partner used to be chief economist at the Labor Department. So our 2½-year-old is used to missing breakfast with her parents on employment-report Fridays.

Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance