Out of the carnage of the Great Depression and World War II rose the idea of gross domestic product, or GDP: the ultimate measure of a country's overall welfare, a window into an economy's soul, the statistic to end all statistics. Its use spread rapidly, becoming the defining indicator of the last century. But in today's globalized world, it's increasingly apparent that this Nobel-winning metric is too narrow for these troubled economic times.
1937: Simon Kuznets, an economist at the National Bureau of Economic Research, presents the original formulation of gross domestic product in his report to the U.S. Congress, "National Income, 1929-35." His idea is to capture all economic production by individuals, companies, and the government in a single measure, which should rise in good times and fall in bad. GDP is born.
1944: Following the Bretton Woods conference that established international financial institutions such as the World Bank and the International Monetary Fund, GDP becomes the standard tool for sizing up a country's economy.
1959: Economist Moses Abramovitz becomes one of the first to question whether GDP accurately measures a society's overall well-being. He cautions that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output."
1962: But GDP evangelists reign. Arthur Okun, staff economist for U.S. President John F. Kennedy's Council of Economic Advisers, coins Okun's Law, which holds that for every 3-point rise in GDP, unemployment will fall 1 percentage point. The theory informs monetary policy: Keep growing the economy, and everything will be just fine.
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