How Should We Measure Economic Growth?

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Wisconsin IDEA

Insight • Data • Economics • Analysis

Wisconsin’s Future Economic Growth Differs by How It’s Measured

If there is a single measure of economic growth it would be gross domestic product (GDP). It represents the total value of all finished goods and services produced within a country’s (or state’s) borders within a specific time. To compare different regions, it is common practice to adjust total GDP to a population base, specifically GDP per capita. This simple adjustment allows for comparisons of different countries and/or states. But some economists are suggesting that as society ages this simple adjustment can be misleading. Japan is often used as an example, where on a per capita basis the economy appears to be lagging behind other developed economies. But as Japan ages the growing number of older people not in the workforce making direct contributions to GDP could be distorting what is happening to the Japanese economy. Some economists are suggesting that rather than adjusting GDP by total population the adjustment should be by the working age population. When this adjustment is made to the Japanese data, growth of the Japanese economy appears stronger than the U.S. economy.

Figure 1. Wisconsin Gross Domestic Product

Consider GDP for Wisconsin (adjusted to 2012 dollars to remove the artificial effects of inflation) where GDP per capita and GDP per population age 24 to 65 are compared. Because GDP is adjusted to different reference population, the level of GDP per working age population will be much higher than GDP per total population. The more relevant observation is the growth rates between the two measures. For GDP per total population the average annual growth rate from 1970 to 2023 is $646.16 but for GDP per working age population the average annual growth rate is $1,022.20. As the Wisconsin population ages, retires and lives longer, we need to think more deeply about how we measure economic growth.

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