I n t h I s c h a p t e r y o u w I l L

F r o m G r e e n s p a n , a ( Tr u l y )
W e i g h t y I d e a
B
Y
D
AVID
W
ESSEL
Having weighed the evidence carefully,
Federal 
Reserve 
Chairman 
Alan
Greenspan wants you to know that the
U.S. economy is getting lighter.
Literally.
When he refers to “downsizing” in
this instance, Mr. Greenspan means that
a dollar’s worth of the goods and ser-
vices produced in the mighty U.S. econ-
omy weighs a lot less than it used to,
even after adjusting for inflation.
A modern 10-story office building,
he says, weighs less than a 10-story
building erected in the late 19th century.
With synthetic fibers, clothes weigh less.
And the electronics revolution has pro-
duced televisions so light they can be
worn on the wrist.
By conventional measures, the [real]
gross domestic product—the value of all
goods and services produced in the
nation—is five times as great as it was
50 years ago. Yet “the physical weight
of our gross domestic product is evi-
dently only modestly higher than it was
50 or 100 years ago,” Mr. Greenspan
told an audience in Dallas recently.
When you think about it, it’s not so
surprising that the economy is getting
lighter. An ever-growing proportion of
the U.S. GDP consists of things that
don’t weigh anything at all—lawyers’
services, psychotherapy, e-mail, online
information.
But Mr. Greenspan has a way of
making the obvious sound profound.
Only “a small fraction” of the nation’s
economic growth in the past several
decades “represents growth in the ton-
nage of physical materials—oil, coal,
ores, wood, raw chemicals,” he has
observed. “The remainder represents
new insights into how to rearrange those
physical materials to better serve human
needs.” . . .
The incredible shrinking GDP helps
explain why American workers can pro-
duce more for each hour of work than
ever before. . . . [It] also helps explain
why there is so much international trade
these days. “The . . . downsizing of out-
put,” Mr. Greenspan said recently,
“meant that products were easier and
hence less costly to move, and most
especially across national borders.” . . .
“The world of 1948 was vastly dif-
ferent,” Mr. Greenspan observed a few
years back. “The quintessential model of
industry might in those days was the
array of vast, smoke-encased integrated
steel mills . . . on the shores of Lake
Michigan. Output was things, big physi-
cal things.”
Today, one exemplar of U.S. eco-
nomic might is Microsoft Corp., with its
almost weightless output. “Virtually
unimaginable a half-century ago was the
extent to which concepts and ideas
would substitute for physical resources
and human brawn in the production of
goods and services,” he has said.
Of course, one thing Made in the
U.S. is heavier than it used to be: peo-
ple. The National Institutes of Health
says 22.3% of Americans are obese, up
from 12.8% in the early 1960. But Mr.
Greenspan doesn’t talk about that.
S
OURCE
: 
The Wall Street Journal,
May 20, 1999,
p. B1.
I N T H E N E W S
GDP Lightens Up

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PA R T E I G H T
T H E D ATA O F M A C R O E C O N O M I C S
C A S E S T U D Y
INTERNATIONAL DIFFERENCES IN GDP AND THE
QUALITY OF LIFE
One way to gauge the usefulness of GDP as a measure of economic well-being
is to examine international data. Rich and poor countries have vastly different
levels of GDP per person. If a large GDP leads to a higher standard of living,
then we should observe GDP to be strongly correlated with measures of the
quality of life. And, in fact, we do.
Table 22-3 shows 12 of the world’s most populous countries ranked in order
of GDP per person. The table also shows life expectancy (the expected life span
at birth) and literacy (the percentage of the adult population that can read).
These data show a clear pattern. In rich countries, such as the United States,
Japan, and Germany, people can expect to live into their late seventies, and
almost all of the population can read. In poor countries, such as Nigeria,
Bangladesh, and Pakistan, people typically live only until their fifties or early
sixties, and only about half of the population is literate.
Although data on other aspects of the quality of life are less complete, they
tell a similar story. Countries with low GDP per person tend to have more
infants with low birth weight, higher rates of infant mortality, higher rates of
GDP is not, however, a perfect measure of well-being. Some things that con-
tribute to a good life are left out of GDP. One is leisure. Suppose, for instance, that
everyone in the economy suddenly started working every day of the week, rather
than enjoying leisure on weekends. More goods and services would be produced,
and GDP would rise. Yet, despite the increase in GDP, we should not conclude that
everyone would be better off. The loss from reduced leisure would offset the gain
from producing and consuming a greater quantity of goods and services.
Because GDP uses market prices to value goods and services, it excludes the
value of almost all activity that takes place outside of markets. In particular, GDP
omits the value of goods and services produced at home. When a chef prepares a
delicious meal and sells it at his restaurant, the value of that meal is part of GDP.
But if the chef prepares the same meal for his spouse, the value he has added to the
raw ingredients is left out of GDP. Similarly, child care provided in day care cen-
ters is part of GDP, whereas child care by parents at home is not. Volunteer work
also contributes to the well-being of those in society, but GDP does not reflect these
contributions.
Another thing that GDP excludes is the quality of the environment. Imagine
that the government eliminated all environmental regulations. Firms could then
produce goods and services without considering the pollution they create, and
GDP might rise. Yet well-being would most likely fall. The deterioration in the
quality of air and water would more than offset the gains from greater production.
GDP also says nothing about the distribution of income. A society in which
100 people have annual incomes of $50,000 has GDP of $5 million and, not sur-
prisingly, GDP per person of $50,000. So does a society in which 10 people earn
$500,000 and 90 suffer with nothing at all. Few people would look at those two sit-
uations and call them equivalent. GDP per person tells us what happens to the
average person, but behind the average lies a large variety of personal experiences.
In the end, we can conclude that GDP is a good measure of economic well-
being for most—but not all—purposes. It is important to keep in mind what GDP
includes and what it leaves out.
GDP
REFLECTS THE FACTORY
’
S
PRODUCTION
, 
BUT NOT THE HARM THAT IT
INFLICTS ON THE ENVIRONMENT
.

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C H A P T E R 2 2
M E A S U R I N G A N AT I O N ’ S I N C O M E
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Ta b l e 2 2 - 3
GDP, L
IFE
E
XPECTANCY
, 
AND
L
ITERACY
.
The table shows
GDP per person and two
measures of the quality of life for
12 major countries.