Measuring Total Output and Income

6.2 Measuring Total Income

Case in Point: The GDP–GDI Gap

GDP equals GDI; at least, that is the way it is supposed to work. But in an enormously complex economy, the measurement of these two variables inevitably goes awry. Estimates of the two are never quite equal. In recent years, the absolute value of the gap has been quite sizable, while in other years, it has been quite small. For example, for the years 2006 through 2010, GDI has differed from GDP by −242.3, −12.0, −2.4, 77.4, and 0.8 billion per year, respectively.

Although the gap seems large at times, it represents a remarkably small fraction of measured activity - around 1% or less. Of course, 1% of a big number is still a big number. But it is important to remember that, relative to the size of the economy, the gap between GDI and GDP is not large. The gap is listed as a "statistical discrepancy" in the Department of Commerce reporting of the two numbers.

Why does the gap exist? From an accounting point of view, it should not. The total value of final goods and services produced must be equal to the total value of income generated in that production. But output is measured from sales and inventory figures collected from just 10% of commercial establishments. Preliminary income figures are obtained from household surveys, but these represent a tiny fraction of households. More complete income data are provided by income tax returns, but these are available to the economists who estimate GDI only after a two- to four-year delay.

The Department of Commerce issues revisions of its GDP and GDI estimates as more complete data become available. With each revision, the gap between GDP and GDI estimates is significantly reduced.

While GDP and GDI figures cannot provide precise measures of economic activity, they come remarkably close. Indeed, given that the numbers come from entirely different sources, the fact that they come as close as they do provides an impressive check of the accuracy of the department's estimates of GDP and GDI.