The author focuses on the issues surrounding the measurement of real output and productivity. Users of current economic metrics continue to grapple with quality changes and accurately measuring the value of new goods and services. The author highlights the growing difficulty of measuring output in a service-oriented economy as well as the potential implications of this mismeasurement.
How Is This Research Useful to Practitioners?
The author contends that the general public incorrectly uses such measures as real GDP and real personal income to gauge changes in well-being. Current economic measures exclude such factors as health and crime, among others. The media, economists, and the public would benefit from more attention being paid to other measures of well-being, such as the Federal Reserve’s annual reports on the economic well-being of US households. As new goods and services continue to be created, failure to correctly determine the value of these new products can significantly distort the true output of the economy.
Market participants, including investment professionals, should have a greater awareness of economic health and subsequent spending patterns, because this knowledge can help identify investment opportunities. There are numerous measures of economic health, and the author highlights the notion that some of these measures, particularly GDP and inflation, may not accurately reflect the health of the economy or the economic position of individual households. Investment professionals should be aware of this bias and conduct their own due diligence as opposed to relying on the media and economic agencies. Finally, market participants should be aware that these known miscalculations can greatly influence fiscal and monetary policy, which, in turn, can create market disruptions.
How Did the Author Conduct This Research?
The author relies on prior authors’ findings, including the methods used by US government statistical agencies and the extensive academic literature on the subject. Prior US government economic commissions include the Stigler Commission (1961), the Boskin Commission (1996), and the Schultze Commission (2002). The author also uses poll results to discover that views on the economy have tended to be pessimistic compared with the Fed’s surveys of household attitudes, which have found that the majority of respondents live comfortably. As a result of media coverage and politicians discussing understated economic growth, public faith in economic prospects has decreased, as seen in the Pew Research Center poll results.
The author provides examples of current approaches to economic measurement, including the matched model method, the hedonic regression method, and the resource cost method. He outlines the flaws in these approaches, using the computer, health care, and mutual fund industries, among others, as examples. For instance, GDP measurement in the health care industry focuses on the costs of providing health care as opposed to improved patient outcomes. He also examines the history of the inclusion of new products in official price indexes, which is often delayed significantly, as seen in the cell phone, air conditioner, and refrigerator industries.
The author provides valuable insights into various economic calculations and their inherent flaws. These calculations have a far-reaching impact on economic and political policies. I hope that future research will explore how new products and services in one industry can affect observed productivities in other industries.