Skip to main content

ECON 3b GROSS DOMESTIC PRODUCT

I reserve the right to be wrong.



Microeconomics is the study of markets and their participants, and macroeconomics is the study of whole economies. This means we need tools to analyse what is going on at a national level. The most widely accepted areas of macroeconomics are the study of money, of business cycles and of national economic performance using the metric called gross domestic product or GDP.

When we want to measure the size of an economy we empirically measure the value of a subset of transactions in every industry ( with the industry definitions being agreed between those doing the measuring beforehand ) then add 'em all up!



GROSS DOMESTIC PRODUCT / Y

We divide transactions into five distinct types; consumption, investment, government spending, exports and imports. The totals of these categories are tallied separately. Finally, the gross domestic product of an economy is equal to total Investment + total Consumption + total Government spending + total Exports minus Imports; or

Y = I + C + G + (Ex-Im)

Isn't that just super? You can also express the last bit as 'Net Exports' or 'NX' if you prefer the added brevity, but you get Net Exports by subtracting the value of imports from the value of exports, expressed in whatever currency you're using, usually Dollars, Euros or Pounds. The shortened version ergo looks like;

Y = I + C + G + NX

Why is this useful? Well, it's a way of calculating how much economic activity is taking place within a territory over a certain period of time. There are a few catches, of course. It's unavoidable. It counts government spending, and it abstracts away the time aspect of the activities being recorded, simply telling you a certain Dollar/Pound value of activity took place within the given time-frame. Usually that time-frame is a year.



USES

GDP is used to measure an economy's performance, so it's the method used to figure out whether life is good or bad. But placing GDP figures for subsequent years next to each other one can check whether the total is getting bigger each year and by how much. At the most basic level, the faster GDP grows from year to year, the better! Moderating factors in the face of this include the business cycle of boom and bust.

Changes in GDP figures over time are used to divine whether an economy is doing well or badly, and is the generally accepted metric in politics or the media for telling the public how well or badly life is going. It'll also tend to be the main reason a political party either keeps or loses power come election day.



PITFALLS

As mentioned above, GDP is a snapshot and an aggregate. You get one monolithic picture for a year and of all the activity in that year.

GDP cannot be perfectly calculated since it cannot be entirely collated from data at source. That is to say, data is gathered from select sources (this is why all the agencies measuring GDP end up publishing different figures from each other) and has to be averaged since not every transaction can be included. This is the knowledge problem getting in the way of economic positivism.



So there you have it, the beauty that is the beast! Wanna rely on it to tell whether or not you're well off? If so, follow this link, and if not, go here instead.



On the next Ecomony Blogtime;

Matt sinks his teeth into the rich gateau of ad hominem argument fallacies.

Comments

Popular posts from this blog

What Lingos Are Most Similar to English, Though?

Commentaryism - The Death Toll of Capitalism

How many people have died because capitalism exists? How many would still be alive if it had never existed? Let's dig in!

We will take two approaches over the course of this blog post by looking at the the death tolls attributed to the word in its broad popular definition - everything socialists don't like - versus the toll that fits the definition offered previously on this blog.

By the same token I will not lay any outsized figures at any other mode of production's door except where that mode of production demonstrably caused the problem that killed people. It's political ideologies that really matter here, and this is where the first big problem with even trying to lay a specific body count before capitalism runs into problems - there is no political ideology called capitalism.

~~~~~~~~~~~~~~~~~~~~~~~~~~~
Now then, Alfonso Gutierrez says in a comment thread that "capitalism and free-markets have murdered billions of people" which is a risky claim at the …

Trickle-down Economics as Economic Theory in Reality

I watched an interview with Deirdre McCloskey on the Youtube channel of the Institute for New Economic Thinking. [1]

After doing so I contributed to a comment thread, recreated in full below, wherein a chappy who claimed to be an economist tried to convince me that trickle-down economics actually is a serious thing after all. This was in response to my posting a link to Thomas Sowell's article The Trickle-Down Lie, and I am so far unconvinced by the tale the economist in question spun for me.

He cited a paper from the 90's as his example, and I entreat you to have a gander at its abstract and compare that to trickle-down as described by David Stockman in his interview with William Greider on supply-side economics. [2][3][4]

Steve Horwitz isn't in love with the phrase, but offers a decent definition;
It’s hard to pin down exactly what that term means, but it seems to be something like the following: “those free market folks believe that if you give tax cuts or subsidies to …