Budget forecasts may be inaccurate because gross domestic product (GDP), our official measure of economic output, is mismeasured -- minimizing the size of budget surpluses available for tax cuts.

To calculate GDP, the Department of Commerce's Bureau of Economic Analysis adds up personal consumption expenditures by individuals, gross private domestic investment by businesses, consumption and investment by all levels of government, and exports minus imports (net exports). Last year, the sum of these components came to $8,080 billion.

However, output must equal income. Thus the Commerce Department also calculates a figure called gross domestic income (GDI), which sums all of the income in our economy. GDI includes compensation of employees, corporate profits, interest and rents, earnings by the self-employed and other measures of income. In theory, GDI should equal GDP.

• Taxes are paid on incomes, not production, which may explain why tax revenues are rising faster than forecasters expected, when basing their forecasts on GDP.

• In recent years, GDI has grown much more rapidly than GDP; in 1997, it equaled $8,166 billion -- $86 billion more than GDP (see figure http://www.ncpa.org/pd/gif/gdigdp.gif).

• And the trend appears to be accelerating, with GDI exceeding GDP by $114 billion in the first quarter of 1998.

It is not clear why GDI is growing faster than GDP. Some economists believe measured GDP may be too low, because much output is not being picked up by Commerce's traditional measures. For example, it may miss some of the output in fast growing sectors of the economy such as computer software.

Eventually, the GDP data may be revised to eliminate the discrepancy between GDI and GDP. But for now, the faster growth of GDI seems to be a better indicator of our nation's economic health.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 20, 1998.