Using new data and treating financial revenues as a cost to the overall economy, a new measure – Final GDP – performs better than GDP on all three fronts. It also sheds light on several unresolved empirical debates in macroeconomics. First, the phenomenon of the Great Moderation of fluctuations in output appears to be a statistical artefact, as the inclusion of finance in GDP smooths over volatility as well as trends of secular stagnation. Second, the spurious breakdown of Okun’s Law also turns out to be a figment of the data, since GDP by construction has been diverging from employment and aggregate demand. Jobless growth recoveries thus turn out to be merely periods of stagnation when employment growth is naturally subdued. Finally, using in-sample forecasting, FGDP outperforms GDP as a leading indicator, foretelling the Great Recession earlier and more clearly than the standard measure. The paper concludes by assessing some broader implications of the finalization of GDP for economics and politics.
Author: Jacob Assa