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Editors’ note: 

For church leaders to be more effective in seeking the “welfare of the city” (Jer. 29:7) we should know what economic concepts mean, how they should be applied, and how they affect the local church. The purpose of the Economics for Church Leaders series is not to present a theology of economics, but rather to provide a basic level of understanding that will help church leaders think more clearly about how to apply their faith commitments to economics and public policy.

The Term: The Economy (aka Gross Domestic Product)

What It Means: Humans have seemingly unlimited wants and needs—but limited resources. This is known as scarcity, and it’s the fundamental problem in economics. The primary way we solve this problem is through market exchanges or transactions: you make something I want or need, and I give you something you want or need in return (we do this indirectly through the use of money).

A transaction simply consists of a buyer exchanging money or credit with a seller for goods, services, or financial assets, usually for an agreed-upon price. Imagine you buy a newspaper for $3. That is a transaction. Now imagine you bought the newspaper company itself for $300 million. That is also a transaction. In both situations you exchanged a good for money (or credit if you didn’t have $300 million in cash).

“All cycles and all forces in an economy are driven by transaction,” billionaire hedge-fund manager Ray Dalio says. “If we can understand transactions, we can understand the whole economy.”

A primary way we think about transactions is by grouping them together. Such groupings constitute a market, which consists of all the buyers and sellers making transactions for the same thing. If you go to your local farmers’ market you’ll find people engaging in transactions that primarily involve agricultural products, such as eggs or vegetables. If you go to the New York Stock Exchange you’ll find people engaging in transactions that primarily involve stocks. Thus we refer to all places where transactions occur for similar goods as the “______ market” (e.g., the stock market, the wheat market, the book market).

An economy consists of all the transactions in all its markets in a given area. “If you add up the total spending and the total quantity sold in all of the markets, you have everything you need to know to understand the economy,” Dalio says. “It’s just that simple.”

When Americans refer to “the economy,” the given area for transactions they’re referring to is the United States. But how can we reasonably talk about all of the billions of transactions that occur in all of the markets in our country each day? We do it by simplifying it into a single economic metric—Gross Domestic Product (GDP).

GDP is often used as a single number that “measures” the economy. Imagine you wanted to put a price tag on the value of all the final goods and services produced by every sector of the economy (e.g., all the crops grown, all the lattes served at the coffee shop, all the hours billed by lawyers, and so on). The total number you’d put on the price tag is the GDP.

GDP and “the economy” are often treated as synonyms. When we say the economy is growing or shrinking, we’re saying the total value of the goods and services being exchanged (GDP) is increasing or decreasing.

Why It Matters: The U.S. economy is merely the sum total of economic transactions. Why does that matter to church leaders? Because we care about the material needs of other people. The biblical standard of economic justice is that everyone has the resources needed for living. If we care about economic justice, we should care about the economy—specifically the growth of the economy—and how it affects the flourishing of our neighbors. Our primary concern with the economy, therefore, is whether it’s expanding or shrinking.

An economic unit (whether a family, country, or so on) is generally better off when everyone is able to meet all (or nearly all) of their material needs and many of their material non-necessary desires. That is why economic growth is so important. While the issue is complex and requires some nuance to fully explain, the simplistic answer is that economic growth matters because people continue to have babies. If we Christians love babies—and want more of them around—we should be concerned about economic growth.

GDP can tell us about the state of our economy, but the economy cannot tell us the state of our souls.

Before we explain the baby–GDP connection, though, let’s consider the consequences if there were a long period in the United States with no economic growth:

  • Unemployment and poverty would skyrocket.
  • The national debt would increase as tax revenues declined.
  • Banks and other financial institutions would go bankrupt, leading to housing and credit crises.
  • Housing and land prices would sharply increase.
  • Food prices would increase, leading to famine in other countries and hunger in our own.
  • Social welfare programs would have to be scaled back.
  • Federal and state governments would not be able to service their debts.
  • Workers would have to work longer hours to maintain their current standard of living.

In other words, as soon as economic growth stops, economic decline starts. But what causes the immediate decline? In a word: babies. As the population increases, more resources are needed to feed, clothe, and shelter all the new people being created. To understand why this is happens, let’s consider a scaled-down economic model.

Imagine a village that has 100 people living in a state of economic equilibrium. Their economy is neither growing nor shrinking; their GVP (Gross Village Product) never changes. Everyone has just enough food, clothing, shelter, and other amenities to take care of themselves—no more and no less than enough for subsistence living. Now let’s imagine a “baby boom” occurs, and 20 new children are added to the village. What happens to the standard of living for the villagers? Assuming they redistribute their resources equitably, everyone (including the new children) will only have 83 percent of the resources they need to survive. Over time, they will begin to starve or die of malnutrition.

We can see this occurring today in countries with low economic growth (i.e., a stagnant or declining GDP). As the population increases, there aren’t enough resources for everyone to rise above the poverty level.

Similarly, in the United States we need to create around 70,000 new jobs each month just to keep up with the babies who are growing up and entering the labor market. If the economy does not grow, there will be no jobs for them. In the short term, we can merely shift resources around through redistribution, such as unemployment compensation or welfare benefits, to prevent the unemployed from going hungry. But without long-term growth—that is, without long-term increases in GDP—a country’s wealth becomes depleted, causing instability and social breakdown. However, if the new workers do find jobs and engage in productive labor, the economy will automatically grow as these laborers buy goods and services.

Because of economic growth we have less hunger, poverty, and disease, and increase in life expectancy measured in decades. It’s also the reason why about 1.1 billion fewer people are in poverty today than in 1970. As a result of economic growth in countries such as China, the number of extremely poor people in the world is three-times lower than in 1970.

The number of extremely poor people in the world is three-times lower than in 1970.

Growing the economy is not a goal that should be pursued for its own sake, nor is it a means to achieve a materialist paradise. Economic growth is not the chief end of man, but merely the blessing that results from fulfilling God’s dual cultural mandate: be fruitful and multiply, and steward the earth’s resources (Gen. 1:28).

Other Stuff You Might Want to Know:

The local economy may differ radically from the national economy. The national economy comprises all the various markets within the United States. Local economies, though, tend to be dominated by specific markets. For instance, people in Iowa are more affected by agricultural markets than residents of Rhode Island are. Even if the GDP is growing, Iowans may be suffering if agricultural markets fare poorly. This is why church leaders should be aware of which markets have the most influence on the people in the area of their local church.

The “economy” is a 20th-century invention. We hear “the economy” so often that it’s hard to believe it was a 20th-century invention. But it was invented for the Great Depression. As Zachary Karabell, author of The Leading Indicators, explains:

It was invented because there was clearly a perception that there was something really, really bad going on but they didn’t really know what. You could see there were homeless people on the street, you could see there were the Okies heading from their Dust Bowl farms off to California by the tens of thousands, but there was no way of really grasping it.

How GDP is measured. GDP can be determined in three ways. One of the most common is the expenditure approach (i.e., all expenditure incurred by individuals during a given year). The formula is:

Y = C + I + G + (X − M)

Where (Y) is the sum of (C) consumption (i.e., consumer spending), (I) investment (e.g., investment made by businesses), (G) government spending (e.g., government salaries, weapons systems), and (X – M) net exports (i.e., the stuff we send to other countries minus the stuff we import from others).

GDP is not GNP. Gross Domestic Product and Gross National Product sound so similar that many assume they’re the same. The key difference is that GDP is based on the geographical location of production while GNP is based on ownership of production. If a U.S. or foreign firm operates within the borders of the United States, its production counts toward GDP. But if a U.S. firm operates in a foreign country, its output counts toward GNP, but not GDP.

No one runs or controls the economy. One of the most persistent myths in public life is that the president or Congress gets credit or blame for the economy. The reality is that the economy is so complex and enormous—GDP is currently $20.54 trillion—that no person or institution has that much influence. As the biggest buyer and spender in America, the government engages in lot of transactions. In 2019, the government accounted for about 17 percent of GDP. But the U.S. president doesn’t even have control over all government spending, much less over the entire economy. Yet humans are prone to magical thinking, and the idea that somebody must be in charge of the economy is persistent.

Church leaders should be aware of which markets have the most influence on the people in the area of their local church.

GDP is an indicator of recessions. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by GDP. (This is the standard definition, though the National Bureau of Economic Research—the agency that officially determines recessions—doesn’t necessarily need to see this occur to call a recession.)

GDP doesn’t measure standards of living. If you divide a country’s GDP by the number of people living in that country, you get GDP per capita. This number, however, doesn’t really tell you much about individual living standards. It would be like dividing a family’s income by the number of people in the family. A family may earn $100,000 a year, but that doesn’t mean the two children in a family of four have $25,000 of their own.

Decreasing GDP can be a sign that a nation is worse off than it should be, but an increase in GDP does not necessarily mean the average individual’s standard of living has increased. Sometimes it’s just improper accounting. For example, in 2010, Ghana made its GDP go up 60 percent overnight just by changing its measurement conventions. The standard of living for Ghanians, however, didn’t increase just because of the accounting change.

GDP shouldn’t be judged for being something it’s not. In 1968, presidential candidate Robert Kennedy famously said that GDP “does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate, or the integrity of our public officials.” All of that is true—and completely irrelevant.

GDP can tell us about the state of our economy, but the economy cannot tell us the state of our souls. We shouldn’t criticize a metric for failing to measure something it was never intended to gauge. Rather than blame the abstract “economy,” we should point out how individuals may be failing to promote biblical justice in the economic choices they make.