In their seminal textbook “Economics,” Paul Samuelson and William Nordhaus liken GDP’s ability to provide an overall picture of the economy to a satellite that can survey weather across a continent. GDP enables policymakers and central banks to judge whether the economy needs a boost or restraint, whether a threat such as a recession or inflation is on the horizon.
However, despite its many strengths, GDP does have its shortcomings. Most significantly, it excludes informal economic activity. Because it relies on recorded transactions and official data, it does not take into account the value of under-the-table employment or underground market activities, unremunerated volunteer work, and household production.
Furthermore, because it focuses on final consumption and capital investment and deliberately nets out intermediate spending and business-to-business transactions, it is less sensitive as a measure of economic fluctuations than metrics that include these components. Finally, GDP is not a good measure of well-being because it focuses on material output, whereas the welfare of individuals depends on how they use their resources.
The sharp slowdown in global GDP during the COVID-19 pandemic raises critical questions about how it affected economic activity and what its long-term implications might be. The answers to these questions are vital for improving the design of public policies and for assessing whether the world has recovered from the pandemic’s negative effects. This article aims to answer these questions by decomposing the change in global GDP into its components.
