Everyday consumers go to the grocery store and purchase eggs. Gross Domestic Product (GDP) tracks that purchase, as well as all the other purchases made by consumers. In our last article we wrote on GDP and how it is used to monitor the current economy by measuring the monetary value of final goods and services purchased by a final consumer. But this leaves out a huge piece of the economic picture. How did the eggs get to the grocery store? What happened, and more importantly, how much was spent, getting them on the store shelf? There is another tool that allows us to see deeper into the economy and gives a clearer picture of what’s really going on called Gross Output (GO).
Gross Output depicts a different narrative. It generates a deeper, more encompassing view of the economy, showing the central role that businesses’ purchasing and spending plays in the national income and economic health. GO not only includes the final sale of an item (GDP), but all the purchasing that takes place in between, meaning you can measure the economy at all stages of production. You can think of it like the difference between an x-ray, which shows the general internal map and structure, and a CT scan, which shows a more detailed picture of not just bones, but organs and tissues as well. GDP shows a basic overview, just like the x-ray, but the GO shows us deeper and more complex systems and functions.
GDP ignores business to business activity and supply chains, which is more than half the spending that takes place in our economy. This makes it seem like consumer spending makes up the majority of the economy, but consumers can’t consume unless there are products being made in the first place, and those products can’t be made without spending and
purchasing on a production and manufacturing level. Leaving out the supply chain is a huge omission; this is why the GO is so important to track. Imagine only tracking the purchase of eggs to determine the health of the economy, instead of factoring in the cost of keeping and feeding the chicken, the farm, the packaging plant, and the delivery truck.
Gross domestic product (GDP) showed 2.6% growth in the fourth quarter, but gross output (GO, which measures spending during all stages of production) only grew by 1% or less. GO and GDP don’t always move in the same direction or at the same rate. GO tends to drop more but recover quicker. However, studies have shown that whenever GO grows at a slower pace than GDP, it suggests a slowdown or recession is in the future.
All this isn’t to say that GDP doesn’t have a place or doesn’t have value. As Mark Skousen, PhD. explains, “GO is the ‘top line’ in national income accounting; GDP is the bottom line. GO and GDP are complementary but tell different stories.” Gross Output is another tool in our box that can help us better understand the current economy and help us see where the growth is happening.