What Does "The Economy" Actually Mean?

Politicians say "the economy is strong." Economists point to GDP growth. Your neighbor complains they can't afford groceries. Somehow, all three statements can be true simultaneously. So what does "the economy" actually mean, and why does it feel so different depending on who's talking about it?

The Economy Is Everything, Everywhere

At its most basic, the economy is the sum of all production, consumption, and exchange of goods and services within a geographic area. It's every transaction you buy coffee, a factory making cars, a hospital providing care, a teacher educating students. Add it all together across a country, and you get "the economy."

Economists measure this primarily through Gross Domestic Product, or GDP. The International Monetary Fund projects global growth at 3.3 percent for 2026 and 3.2 percent for 2027. That means the total value of everything produced worldwide will increase by those percentages.

But here's the catch: GDP measures total output, not how that output gets distributed. It's an average, and averages hide enormous variation. If nine people earn $40,000 annually and one person earns $1 million, the average income is $136,000, a number that describes nobody's actual experience.

Why "Good" Statistics Feel Bad

Recent research from the World Governments Summit reveals something crucial: standard benchmarks like GDP growth are not reliable predictors of how people actually perceive economic conditions. Instead, attitudes are formed by personal household finances whether individuals feel secure, can manage the costs of housing and essentials, can secure dignified employment, and witness tangible economic improvement in their everyday existence.

This explains why the United States can have solid GDP growth while nearly 60 percent of consumer spending in the third quarter of 2025 came from just the top 20 percent of income earners. The economy is growing, but most of that growth is captured by a small segment of the population.

Research across 27 countries shows that people at higher risk of poverty are less likely to offer positive assessments of the economy despite good macroeconomic news like GDP growth or low unemployment. Aggregate national data points are "far removed from their daily struggles." These individuals know less about economic performance by standard indicators but offer more accurate estimates of national poverty rates they're tracking different, more personally relevant metrics.

The K-Shaped Reality

Economists call this a "K-shaped economy" a recovery or expansion where different groups experience vastly different outcomes. One arm of the K goes up as higher-income households benefit from rising asset values, remote work options, and investment returns. The other arm goes down as lower-wage workers face layoffs, inflation eating away purchasing power, and limited flexibility to adjust.

During recent years, higher-income households benefited from surging stock markets and rising home values. Lower-income households faced historic inflation on necessities food, housing, utilities which represent a much larger share of their budgets. The same 3% inflation rate hits completely differently when essentials cost you 40% of your income versus 17%.

Twenty-nine percent of American adults said they were worse off financially in 2024 than a year earlier. That's down from the 35 percent peak in 2022, showing improvement. But it's still well above pre-pandemic levels. The share who said they were better off was just 23 percent.

What Gets Measured Matters

The economy includes employment rates, but unemployment below 5% doesn't capture people working multiple part-time jobs to survive. It includes GDP per capita, but that average conceals whether wealth concentrates at the top. It includes inflation rates, but aggregate inflation misses that beef prices spiked 16% while wages barely budged for many workers.

When researchers ask about intergenerational progress are you better off than your parents were at your age? 53 percent of Americans say yes. That's down from 57 percent in 2019. One-fourth think they're worse off than their parents were, a troubling reversal of the traditional American expectation of upward mobility.

The Bottom Line

"The economy" is both a massive aggregate system and billions of individual experiences. When someone says "the economy is strong," they're usually referring to GDP growth, stock market performance, or unemployment rates. When someone says "the economy is terrible," they're usually describing their personal financial reality.

Both can be accurate. The economy can grow while most people struggle. Statistics can improve while your grocery bill doubles. Understanding this disconnect is essential for making sense of economic debates and for recognizing that your personal experience, even if it contradicts the headlines, is valid and real.