real GDP v. real GDP per capita

WHICH economy has enjoyed the best economic performance over the past five years: America's or Japan's? Most people will pick America. The popular perception is that America's vibrant economy was sprinting ahead (albeit fuelled by credit and housing bubbles that have now painfully burst), whereas Japan crawled along at a snail's pace. And it is true that America's average annual real GDP growth of 2.9% was much faster than Japan's 2.1%. However, the single best gauge of economic performance is not growth in GDP, but GDP per person, which is a rough guide to average living standards. It tells a completely different story.

GDP growth figures flatter America's relative performance, because its population is rising much faster, by 1% a year, thanks to immigration and a higher birth rate. In contrast, the number of Japanese citizens has been shrinking since 2005. Once you take account of this, Japan's GDP per head increased at an annual rate of 2.1% in the five years to 2007, slightly faster than America's 1.9% and much better than Germany's 1.4%. In other words, contrary to the popular pessimism about Japan's economy, it has actually enjoyed the biggest gain in average income among the big three rich economies. Among all the G7 economies it ranks second only to Britain (see left-hand chart)...

Once you accept that growth in GDP per head is the best way to measure economic performance, the standard definition of a recession—a decline in real GDP over some period (eg, two consecutive quarters or year on year)—also seems flawed. For example, zero GDP growth in Japan, where the population is declining, would still leave the average citizen better off. But in America, the average person would be worse off. A better definition of recession, surely, is a fall in average income per person. On this basis, America has been in recession since the fourth quarter of last year when its GDP rose by an annualised 0.6%, implying that real income per head fell by 0.4%.

Many Americans will shrug this off, especially those politicians who believe that the prime goal of policy is to retain their economic and military dominance over the world. They see the size of a country's GDP as the best measure of its economic clout, in which case the absolute rate of GDP growth matters more than growth in income per head. Europeans seem less bothered about global dominance—although they are sure to gloat about the fact that the weakening dollar means that the euro area could overtake America as the world's biggest economy this year.

from the Economist

Interesting. The standard definition will likely remain two consecutive quarters of falling real GDP. Although the NBER does not us this definition any more. They use a slightly more complicated method that is similar to reading tea leaves or chicken bones. Depending on the definition used both sides are right about the beginning of a recession in the 4th quarter.