GDP vs GDI: A tale of two (wildly different) economic indicators

We’ve harped before on the fact that the government’s economic data often is subject to big revisions. And it happened today: According to the Bureau of Economic Analysis, the economy grew at a plodding 1.9 percent annual pace in the first quarter of 2012. That’s down from earlier estimates of a 2.2 percent pace.

(Daniel Acker - BLOOMBERG) Bad news. The economy’s doing even worse than we thought. Or is it? One somewhat confusing aspect of the BEA’s economic releases is that it actually uses two different numbers to measure economic growth. There’s gross domestic product (GDP), which measures expenditures. That’s the number that’s getting all the headlines. But there’s also gross domestic income (GDI), which measures income.

In theory, these two numbers should line up — if one person’s spending money in the economy, that should show up as another person’s income. But because of measurement errors, they often differ wildly. And they tell very different stories. In the first quarter of 2012, for instance, GDI increased by 2.7 percent. That suggests a somewhat healthier recovery.

Going further back in time, GDP and GDI have often been at odds with each other. In the past three quarters, GDP has grown at an average 2.2 percent pace. That’s disappointing. But GDI has grown at an average of 2.6 percent. That’s slightly more respectable. Wharton economist Justin Wolfers offers a chart for comparison purposes:

Okay, now which figure is the correct one to use? That’s the tougher question. Last year, Binyamin Appelbaum wrote an article on why the two measures seemed to diverge. The Bureau of Economic Analysis prefers GDP, since it does a terrific job of distinguishing between a growing economy and a shrinking economy. But GDP calculations can also be quite raw in places — if the government underestimates, say, how much the nation is spending on imported oil, then the GDP figures will be off. And these sorts of errors can lead to gaps between GDP and GDI, at least in early releases.

Other economists, meanwhile, think that GDI is a more reliable indicator. See Jeremy Nalewaik’s paper here (pdf). If people had been paying closer attention to GDI instead of GDP in the first quarter of 2011, they would’ve realized that the economy was in much worse shape than initial press releases suggested.

And Wolfers, a longtime GDI defender, says that we should pay more heed to today’s 2.7 percent income growth. “Today’s data,” he writes, “should have led you to revise *UP* your estimate of the pace of economic activity in Q1.”

So how’s the economy actually doing? A lot depends on which indicator you’d prefer to use.

Update: There’s a lot more on this topic from Dean Baker here.