We hear about the economy growing, shrinking, or stagnating (but rarely taking a break). What are the main economic indicators and what do they measure? What does that mean?
Gross Domestic Product (GDP) or economic outputis the most widely used measure of the state of the economy. It’s the market value of all final goods and services produced in an economy in a given time period. The largest share of GDP is made up of goods and services produced for private consumption and housing, which accounts for almost two-thirds of the total. Public services and investment make up the second-largest share (about one quarter), followed by business investment (one-eighth), and then exports less imports.
For all goods and services exchanged, there’s a resulting payment and income. That means GDP can also be measured by income, which is divided by wages, salaries and other income (about 57 per cent of the total), corporate profits and business income (19 per cent), taxes on products and production (11 per cent) and depreciation (13 per cent).
However, GDP isn’t a measure of well-being. It doesn’t account for the distribution of income, unpaid work in the home, environmental values, or the costs of pollution and crime. Attempts are being made to account for these; as a measure, GDP is evolving, but very slowly. GDP changes are usually reported on a “real” basis, adjusted for price changes.
Inflation is a measure of how much the general price level is changing, adjusted in some ways for product quality. There are many different measures of inflation. GDP is adjusted for inflation using GDP deflators, but the most widely used measure of inflation is changes in the Consumer Price Index (CPI).
The CPI calculates the price of a representative “basket” of consumer goods and services. It doesn’t measure the real cost of living—that’s affected by other factors as well—but it’s the main indicator used to calculate whether wages are improving in real terms or not.
Much of Canada’s tax system, many pensions, transfer payments, and some incomes are indexed by the CPI, so it’s an important measure.