It Is Highly Likely That Real Economic Growth In The US Has Been Overestimated

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We discussed the issue with the definition of inflation in the US in many posts (e.g., this one). The principal finding was that the CPI and GDP deflator, dGDP, started to deviate in 1979 due to the introduction of a new price inflation definition.

Figure 1 presents the CPI and dGDP, and gives a clear understanding that the dGDP is just the CPI divided by 1.22. This is an important observation for an unbiased real GDP per capita estimate in the US. The new definition was likely introduced to obtain a larger real GDP per capita than was calculated with the CPI.

Figure 2 presents the real GDP per capita reported by the BEA and was recalculated using the ratio of the CPI and dGDP. One can see that the GDP per capita in 2019 should be $39,500 instead of the reported value of $49,649, i.e. only 80% of the current level.

It is highly likely that real economic growth in the US has been overestimated by 26% since 1979.

Figure 1. The CPI and dGDP in the US. After 1979, dGDP=CPI/1.22.

Figure 2. The GDP per capita estimates in the US as published by the BEA, and has since been corrected with the difference between the dGDP and CPI.

Disclosure: None. 

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