Measuring The Financial Sector

Real Time Economics (WSJ Blog) – Number of the Week: Finance’s Share of Economy Continues to Grow

8.4%: The financial sector’s share of gross domestic product. Given everything that’s happened, surely the financial sector’s role in the economy is smaller now than it was before the recession hit, right? Wrong. Combined, finance and insurance firms accounted for 8.4% of U.S. gross domestic product last year, according to the Commerce Department, eclipsing the peak it hit in 2006. In 1950, the financial sector accounted for just 2.8% of GDP…New research by New York University economist Thomas Philippon suggests that the financial sector is enormously outsized. He finds that, despite all the advances in information technology since the 1980s, the financial sector has become steadily less efficient: All that it has been gained from increased computing power and vast communications networks has been taken away, and then some, “by increases in trading activities whose social value is difficult to assess.” The upshot, says Mr. Philippon, is that finance’s share of GDP really ought to be about two percentage points lower than it is now. The industry’s travails may be far from over.


Below are a couple of our favorite charts that help put the financial sector into perspective.

Click to enlarge:


Source: Arbor Research

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