Here's why gross domestic product (GDP) is not as good of a metric as you think it is…
Every Wednesday, I talk about various tips and topics about investing with hopes to help you boost your investment portfolio. My goal is to encourage you to apply these strategies so you can achieve financial stability in the long run. Today, let’s focus on one of the most controversial topics in the world of finance. Keep reading below to know why the U.S. remains the dominant economic power despite talks of other “superpowers” rising up in the world.
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Here's why gross domestic product (GDP) is not as good of a metric as you think it is… Gross domestic product (GDP). —the monetary value of all finished goods and services made within a country during a specific period. This metric provides an economic snapshot of a country and is used to measure the size of an economy and its growth rate. Did you know that whenever the mainstream media mentions GDP, almost everyone’s ears perk up? It doesn’t matter if they’re talking about total GDP levels or the tiniest year-over-year changes. The bottom line is, the topic of GDP always generates MAJOR headlines. This is especially true when it comes to the U.S.-versus-China debate. According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, nothing draws eyeballs like foreboding forecasts about China’s imminent rise to power. The media loves to claim China will soon be the largest economy in the world. Here’s the thing about GDP, though: The metric is completely flawed. Professor Litman says we’ve been programmed to think of GDP as the end-all, be-all measure of economic performance… but it isn’t. GDP doesn’t tell the full story of a country’s success. Sure, it measures transactions but doesn’t speak to the value of those transactions. What’s more? GDP doesn’t show how much a country is spending on innovation or its citizens’ well-being. In other words, the metric doesn’t reflect profitability. Indexes from workplace consulting firm Gallup indicate worldwide happiness and well-being are on the decline. Does GDP tell you any of that? NO. That’s why in today’s article, we’ll talk about why you should take GDP measures with a HUGE grain of salt. Additionally, we’ll explain why you don’t have to worry about the U.S. losing to China anytime soon.
GDP as a “Self-Reported” Metric According to Professor Litman, GDP’s figures aren’t as scientific as politicians want you to believe. Take for example what happened to Ghana in 2010. The country changed how it calculated GDP, so the numbers grew 60% overnight. This wasn’t some miracle economic surge—it was simple math. By changing the base year from 1993 to 2006, Ghana added an extra USD 13 billion to its GDP. Plus, the country was able to climb from a “low income” to a “middle income” ranking! Professor Litman says this kind of statistical rejiggering is a classic example of how countries can manipulate GDP figures for their own gain. … and with countries like China, it might not just be bad math; it might also be outright exaggerations. Assistant Professor Luis Martinez of the University of Chicago found that China, Russia, and other authoritarian governments may inflate GDP figures by as much as 15% to 35% per year. He arrived at that estimate by comparing how much the countries’ nighttime light usage changes over time. Most mainstream media reporters aren’t analyzing satellite data. So, when headlines suggest that China is only a few years away from surpassing U.S. GDP, keep in mind that those predictions might be based on false data. Look at this: U.S. GDP was USD 23 trillion in 2021. China’s was supposedly USD 17.7 trillion. If Assistant Professor Martinez is correct, that means China’s GDP might have only been USD 15 trillion in reality. See the discrepancies in manipulated GDPs? Clearly, one shouldn’t just look at GDP and make a conclusion from there regarding a country’s economic power. So, is China still a long way off from overtaking the U.S. as a world power? YES. U.S. corporations generate more economic profit than the rest of the world’s companies combined. They generate over 10 times as much as Chinese firms do. China has shown lots of transactions that say nothing about profitability. To say that China is number 2 is like saying that the best kid on your high school basketball team is number 2 when going head-to-head with Michael Jordan. Besides, the U.S. and China aren’t even in the same league! So, the next time you see a headline about China catching up or surpassing America because of GDP, remember that GDP doesn’t tell the FULL story. … and while you should look beyond GDP, you shouldn’t look past the U.S. It still remains the best long-term place to keep or invest your money. Hope you’ve found this week’s insights interesting and helpful. EXCITING NEWS AHEAD The world of work has shifted, and there’s no going back. The barriers to entry have never been lower for talented professionals to work independently, and today’s massive external workforce is hardly a pandemic-produced fad. Business owners can only survive in the new work landscape by partnering with this deep talent pool. With decades of experience in both small-business entrepreneurship and executive management at PwC, I truly believe that the future of work is independent. With that, I’m happy to share with you that my book, co-authored with Walter Scott Lamb, is now available for pre-order on Amazon! Free Birds Revolution: The Future of Work & The Independent Mind This is an essential read for both independent professionals and corporate executives. Here, we provide educational and practical guides to unpack the ever-growing workforce and offer you crucial ways to become a client of choice. Click on the link above to pre-order your copy. Let this book help you future-proof your career and organization in the new world of work. Normally, folks tune in to Berkshire Hathaway’s earnings calls to see what stocks Warren Buffett is buying. Learn more about when is the only time cash is a good investment in next week’s article! |
