Question

Why is gross output a better measure of overall economic activity than GDP is? How could you construct a new statistic that focuses only on nonfinal economic activity? Given what you know about the behavior of GO and GDP during the Great Recession, would you expect your new statistic to show more or less volatility than GO and GDP? Why? How would you rank the three in terms of volatility?

Short answer

Gross output is one of the most accurate measures to identify the well-being of an economy because it measures the supply side statistic of an economy.

A new statistic focused on nonfinal economic activity can be constructed by subtracting GDP from GO.

The new statistic will be highly volatile as it is the difference between the GDP and GO.

In terms of volatility, the new statistic will be having higher volatility followed by GO and GDP.

Step-by-step solution

Gross Output is better than GDP

The Gross Output is considered a better measure than GDP while measuring overall economic activity. GDP measures the goods and services produced in an economy during a particular period, while Gross Output mainly focuses on the total economic activity that occurred in an economy.

Unlike GDP, GO is a supply-side statistic of an economy, and its primary focus is on the production side rather than the demand side, on which GDP is focused. So GO is much better than GDP while measuring economic activity.

Construction of a new statistic

The new statistic that focuses on economic activity can be constructed using subtracting GDP from GO. The gross output is a broader measure than the GDP. GDP concentrates only on the final output, while GO accounts for each stage of production separately.

Volatility of the new statistic and ranking of each measurement

The new statistic will be volatile in nature.It is because the GDP is not included in the new statistic. Also, the variability of GDP is relatively less. So the new statistic will be highly volatile while comparing to both GO and GDP.

While arranging them in order of volatility, the new statistic will be at the top. The GO will come next in order, and the least volatile will be the GDP.