- There's been a lot of passionate arguing about the state of the economy these days, with economists and experts saying it's doing pretty good while surveys and social media insisting it's the pits.

- While we don't want to revisit that particular debate in our comments section, it does bring up a good question and one that economists and sociologists have been debating for years.

How do we gauge the strength of the economy?

Where do those numbers come from?

What do they actually measure?

- And can they be trusted?

(bright music) - The granddaddy of all economic metrics is GDP.

Gross Domestic Product is a single number that supposedly encapsulates all the market activity that occurs within a country.

There are several different ways to calculate it, but the most popular is the expenditure approach, which totals up all the spending by consumers, businesses, and the government for the year, plus the net value of exports to other countries.

So that slice of pizza you bought for lunch the other day is included in the GDP as is the new pizza oven that the restaurant invested in and the new sidewalk the city built out in front.

- Most countries calculate their own GDPs, and they can be useful for getting an idea of how the world's economies rank in terms of size, but for domestic purposes, GDP is primarily used to track changes over time.

First, you have to adjust the number to account for inflation.

Then this real GDP is compared quarter by quarter to see if the economy is growing or shrinking, and how fast.

If the economy shrinks two quarters in a row, that's typically labeled a recession.

- GDP is used to inform governmental policy, business plans, investment strategies, and political campaigns.

So it's in a lot of people's interest that it's accurate.

The data that goes into it comes from a wide variety of sources, from the IRS to the Census Bureau, trade groups, and labor unions.

Very little of it is collected for the express purpose of calculating GDP, so it would be very hard to fudge.

It's also mostly publicly available info, which means any shenanigans could be easily disproved by independent economists.

- That doesn't mean it's never wrong.

In fact, a 2016 analysis by CNBC found that over the previous 15 years, the government's GDP report contained large and persistent errors with an average quarterly deviation of 1.3%.

These errors show no consistent bias in either direction, and the government is constantly revising them as new, more accurate information comes in.

However, it has led economists to put more trust in the yearly averages than fresh quarterly estimates.

- But even if the numbers were exact, there's a lot of economic activity that GDP doesn't capture.

Unpaid labor for instance.

Tens of millions of Americans act as caregivers for ill or disabled relatives.

Not to mention the untold hours parenting and housekeeping performed mostly by American women, and many economists argue that no picture of the economy is complete without reflecting that work.

- GDP also doesn't factor in figures from black market trade, which though elusive are nonetheless impactful, nor does it count the depreciation of infrastructure and equipment or any ancillary damage to society or the environment.

So a company may make billions selling widgets, but the wear and tear on their machines and the public roads their trucks drive on, don't count against that.

Neither does the toxic waste they pour into the water and the air, which will someday manifest as health and safety expenditures.

- Perhaps most crucially, GDP may tell us that the economy is growing, but it doesn't tell us who is reaping the largest benefit from that growth, nor does it include information about personal debt.

Over the last 50 years, the gap between the rich and poor has widened, and Americans have become more reliant on debt to finance their lifestyles.

But you'd never know it from looking at raw GDP numbers.

- The American economy has also been shifting away from manufacturing and towards jobs in the service, tech, and finance industries.

The value of the things these industries produce has been harder to pin down than say, a car or a washing machine.

For several years, leading up to the crash of 2008, GDP numbers showed strong growth suggesting a healthy economy.

But that data included the high prices of financial investments like subprime mortgages, which we were about to find out were virtually worthless.

This exposed that GDP can only show what people are paying for things, not what they're actually worth.

- During the Great Depression, the government didn't really collect information on the state of the economy, making it near impossible to wrap their minds around what was going wrong or how to fix it.

So the Department of Commerce asked economists, Simon Kuznets, to come up with a metric to gauge the strength of the economy.

- Several years later, Kuznets invention, the GDP, became the gold standard of governments around the world, despite the fact that Kuznets himself repeatedly warned that it revealed nothing about a nation's true health or the wellbeing of its citizens.

- Since then, the government has added more metrics to the overall picture like inflation, unemployment, and consumer spending.

But many economists still say that these numbers leave a lot of important factors out, and some have created prototype dashboards that could supposedly give a more holistic idea of an economy's health.

- For example, the United Nations has created the Human Development Index, which measures the health, education, and standard of living of a country's residence.

The Organization for Economic Cooperation and Development came up with the Better Life Index, which focuses on individuals wellbeing, including social bonds like friends and community.

And the Genuine Progress Indicator was developed by activists and advocates to expose the hidden costs of economic growth, like labor exploitation, and the destruction of the environment.

- These are all noble efforts, but not without weaknesses.

Measuring something like social network support or life satisfaction is a lot hazier than tracking consumer spending.

And who's to say that PhDs make an economy healthier than trade school graduates?

- [Philip] So for now, despite its limitations, GDP is still watched closely by economists, CEOs, and politicians alike.

- But its usefulness depends on acknowledging that it is only one piece of a larger puzzle.

To really know whether a number is good or bad, it has to be viewed in the context of more data from diverse sources.

- It's a balancing act that economists have been working on for decades, and though they've made a lot of progress, there's still a long way to go.