U.S. GDP Is Just a State of Mind

1937: Simon Kuznets presents to Congress a research report called National Income and Capital Formation, 1919–35.
Photograph by Corbis

1937 Simon Kuznets presents to Congress a research report called National Income and Capital Formation, 1919–35.

The biggest thing in the world is the gross domestic product of the U.S. To equal it would take the combined earning power of a dance line of Taylor Swifts 100 miles long. It’s so big that writing out the number rounded-off to the next trillion puts you deep into a forest of zeroes: $18,000,000,000,000.

As big as it is, it doesn’t actually exist. At least not in the physical realm. GDP is an organizing concept, akin to taxonomy or the periodic table.

GDP compartmentalizes a chaotic world, imposing order on the vast flow of daily transactions we call “the economy.” It can be regarded as the sum of all output, or the sum of all expenditure, or the sum of all income. Conceptually, these three ways of attacking the problem should arrive at exactly the same number. That’s elegant.

By the most familiar of the three definitions, the expenditure one, GDP equals C + I + G + (X - M): consumption plus investment plus government spending plus exports minus imports. If you buy a laptop computer for personal use, it goes into C, consumption. If you buy it for work, it goes into I, investment. Thus accountants shape our perception of reality.

Getting a grip on GDP, including its thousands of components, empowers the planners in both Big Government and Big Business. It was conceived mainly in Great Britain and the U.S., first to understand and combat the Great Depression, then to organize war production to defeat the Axis powers. Imitation is the sincerest form of flattery: Today countries as different as China and Nigeria regularly report their GDP using a United Nations-developed standard called the System of National Accounts. In 1999, the U.S. Department of Commerce declared GDP “our greatest achievement” of the 20th century.

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