CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Discrepancies Between National Income and GDP

Discrepancies Between National Income and GDP

Friday, 30 March 2012 05:42

Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. In principle, GDP, which measures the goods and services the economy produce, should be equal to national income, which measures the income generated in the production process. (Every cost to a buyer is income to someone.)

However, they never come out to be exactly equal. They measures of GDP and national income are done independently. The difference, the extent to which GDP exceeds output, is called the "statistical discrepancy."

Appelbaum's post points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.

There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example, there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.

The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.

The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.

This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.

Comments (3)Add Comment
And would the Times or Binyamin Appelbaum consider the Rosnick-Baker paper?
written by Hugh Sansom, March 30, 2012 4:19
We can be reasonably confident that the Times and Appelbaum would have some pat account for why the combined-GDP paper is to be taken seriously while the Rosnick-Baker paper is not. Something appealing to an argument from authority but which really depends on the role the Times plays in inflating expectations and misrepresenting facts.
written by Peter, April 01, 2012 8:54
But GDI exceeded GDP in q3 and q4 while the stock stockmarket was down in the second half of the year. So how can that explain the gap between the two measures?
The Effect of Capital Gains on GDI is lagged
written by dean, April 01, 2012 1:12

the full effect of capital gains on GDI is not felt immediately -- everyone who makes capital gains today does not sell their stock today. We modeled the relationship with 8, 12 and 16 quarter lags. All gave very good fits.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.