Statistics Canada’s GDP release always produces headlines, and so it should: it’s an important, timely indicator of the state of the business cycle. But there’s another indicator that is published along with GDP: Gross Domestic Income (GDI). GDI doesn’t receive much in the way of public attention, but I think it deserves more.
The basic difference between GDP and GDI is that while GDP measures the volume of output produced, GDI attempts to measure how this output translates into buying power. (See here for a recent Statistics Canada study explaining the difference, and see here for an attempt to make the same point in laymen’s terms.) In the standard one-good models that inhabit much of macroeconomics, there’s no point in making this distinction: what is produced is the same thing that that is consumed. And up until 2002 or so, there really wasn’t much point in looking at GDI instead of GDP; both measures produced almost identical estimates.
But the sharp increase in commodity prices and the resulting increase in Canada’s terms of trade have produced a significant divergence between GDP and GDI; see the accompanying graph. Even if the actual production volumes of certain commodities didn’t increase by very much, the higher prices they were able to command on international markets meant that Canadians’ buying power increased by more than GDP. And when commodity prices collapsed in 2008-9, so did that extra buying power, which further aggravated the severity of the recession. The decline in GDP accounted for less than half of the decline in GDI.
Both GDP and GDI bottomed out in the second quarter of 2009, and while GDP has increased by 5.9 per cent as of 2011Q2, GDI has increased by 9.7 per cent. In other words, more than a third of the increase in Canadians’ total purchasing power during the recovery has been generated by favourable changes in the prices of what we produce. Even in the last quarter, the fall in GDP was exactly offset by the improvement in our terms of trade.
The changes in quantities produced that are measured by GDP deserve center stage in the presentation of the quarterly national accounts. But GDI should have better lighting than what it’s getting.
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