The financialisation of the gross domestic product (GDP) has implications for the real economy. The re-classification of a fee-based financial income in GDP has increased the size of the overall economy. Financialised GDP signifies financial investment and enhances the significance of financial institutions.
Since the Western economies have included the FIRE sub-sector in GDP, this has changed their structure of GDP. These structural changes have been applied to the developing economies in the name of international standardisation. GDP per capita has been an indicator of average standard of living in the economy.
Higher GDP per capita used to reflect a high level of economic development. Developed and developing economies have been using this indicator since long. Owing to the financialisation of GDP, researchers now look at the medium income of population to evaluate the standard of living since the medium income deviates from the GDP per capita a great deal.
There used to be a strong link between GDP and unemployment in the advanced economies. This macroeconomic fact is called Okun's Law. Okun's Law states that an increase in GDP will reduce unemployment.
For instance, an increase of 1% in GDP implies a drop in unemployment by 0.5% from 1960 to the 1980s in the developed economies. This statistical fact has been distorted a great deal owing to the financialisation of GDP since the 1990s. GDP used to be a leading indicator of boom and bust cycles in the economy.
A recession in the real economy was depicted through a consecutive drop in GDP for six months or two quarters. The financialisation of GDP has masked this reality. The inclusion of Finance, Insurance and Real Estate (FIRE) sub-sector has reduced the volatility of GDP.
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