Wednesday, September 30, 2009

GDP Revised Up-National Income Down

The second revision of U.S. third quarter GDP change showed a slight upward revision, from -1.0% to -0.7% in volume terms and from -1.5% to -1.3% in terms of trade adjusted terms. Nominal GDP change was revised from -1.0% to -0.8%.

But while this alleged improvement was widely touted in the financial media, no one mentioned that at the same time national income (and gross domestic income(GDI)) was revised down. The only hint of this fact was that the news stories also reported that corporate profits were revised down.

Anyway, while nominal GDP was revised up from $14,143.3 billion to $14,151.2 billion, nominal national income was revised down from $12,161,9 billion to $12,129.9 billion. That was in part the result of falling net factor income from abroad, but mainly a result from an increase in the "statistical discrepancy". In theory (or so we are told), GDP should be equal to GDI, and national income should be equal to Net National Product ((NNP) which is to say GDP adjusted from net factor income from abroad and capital consumption).

We have seen a big change in recent years in "statistical discrepancy", from -$220.6 billion in 2006 (which is to say, GDI/NI was $220.6 billion larger than GDP/NNP) to +249.8 billion (Which is to say, GDP/NNP was $249.8 billion larger than GDI/NI). As a result, while nominal GDI/NI grew by just a few tenths of a percent between 2006 and Q2 2009, nominal GDP/NNP grew by about 5%. The implication here is that the current slump has been far more severe if you rely on GDI/NI than on GDP/NNP.

I will in a later post return to the issue of why this "statistical discrepancy" arises and whether GDP/NNP or GDI/NI are more reliable, but for now let's just say that the latter are at least as reliable and that the U.S. economy has therefore performed much worse than the GDP numbers suggests.


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