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Are traditional economic measures such as GDP still relevant indicators of economic health?
With the economy undergoing some fundamental shifts (such as the emergence of services as the most important economic sector or the overwhelming importance of intellectual property) in recent decades, are traditional measures such as GDP, unemployment, PPI, new home sales, etc still as relevant as they were 20 to 30 years ago.
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3 Answers
I agree with your questions about their relevance, and I believe that our economy has experienced a watershed structural change. Exit stage left an auto industry that could once support thousands of families. And gone are the days where it took massive numbers of employees to effect what advanced technology does today with staffs that are a fraction of those numbers.
Worker displacement is a process that goes on continuously in our society, in many cases throughout history having been offset by emerging new industry. With today’s economic drivers shifting towards more technology-based enterprise, and so introducing the higher output/ lower human capital equation, we might not have the capacity to achieve the same equilibrium as in the past.
Today if we deconstruct the unemployment numbers, we understand that approximately 50% of that enrollment is attributable to unskilled labor. It seems reasonable that a lot of re-training will have to occur - and possibly geographic relocations - in order to get back to unemployment percentages that we previously recognized as ‘normal’. That said, perhaps the 9% figure is an indicator of the new normal, and some of the previous standard economic indicators you mention will have to be considered in a new light.
With currency values all over the board, interest rates being artificially manipulated and stock values almost completely decoupled from firms' actual performance and dividend, I find these fundamental measures are more important than ever.
I do think however, that we may need to update how we measure things like GDP and unemployment to better account for things like outsourced production and underemployed/illegally employed workers among other things.
“Are traditional economic measures such as GDP still relevant indicators of economic health?”
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It depends on context and depth. For a snapshot of general economic activity, without real economic element detail, GDP is fine. As a measure of true health (defining what an economy is has become an interesting field of study in itself) for most advanced mid/economies, it is less relevant than in the past. Globalization and transnational entities, misleading, non-comparable and changing formula design, rising underground economic activity and definitional issues make this an increasingly irrelevant number. What does GDP actually measure that is usable/actionable? For example, although the US is the largest(by far) economic entity in the world, it suffers from many deficiencies in health, education, crime and environmental damage relative to other nations. Its' GDP is increasingly represented by corporate income and investment numbers that are non-US attributable. How do you / should you adjust for that in arriving at a more accurate measure? National statistics are helpful/relevant, of course, but in terms of decision making, they may be less significant to corporate strategic planning which tend to focus on a narrower set of data points.
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