Home › Forums › Discuss Austrian Economics, Step by Step › Definition of GDP
- This topic has 5 replies, 2 voices, and was last updated 6 years, 9 months ago by jmherbener.
September 1, 2016 at 10:33 am #18789
Are capital goods included in the GDP?
If so what parts of the GO statistic are included in it that make it so different than the GDP statistic?
Am I thinking right in that it boils down to considering Say’s law in the health of the economy?
When I look up the word GDP, I get this:
GDP = C + G + I + NX
C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports – Imports).
Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factorySeptember 1, 2016 at 6:42 pm #18790
Gross Output includes the market value of all intermediate capital goods produced during a given time period in addition to the items in GDP. So, not only the market value of automobiles sold to consumers, which is in GDP, but the market value of the iron mined, the steel made, the tires fabricated, etc. are in GO.
Here is Mark Skousen on GO:September 1, 2016 at 8:42 pm #18791
Then the GO would include machinery bought by a capital goods producer?
But the GDP would not include machinery bought by the capital goods producer?
“GDP = C + G + I + NX
C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports – Imports).”
Can you explain what capital expenditures are? And whether they are GDP or GO?September 2, 2016 at 8:59 am #18792
GDP includes the market value of all final goods and services produced during some period of time. Investment, then, are factors of production (mainly capital goods) purchased by entrepreneurs and used by them instead of becoming part of the product they produce which are sold to someone else who then uses them. “Investment” in GDP accounts for the market value of capital capacity, i.e., assets, owned by the entrepreneur throughout the time frame of production. An auto entrepreneur, for example, owns a factory. He holds onto the factory as an asset for decades across hundreds of production runs for which he is purchasing materials and labor. Thus, his “investment” included in GDP is the market value of maintenance and additions to his capital capacity.
http://www.econlib.org/library/Enc/NationalIncomeAccounts.htmlSeptember 3, 2016 at 1:27 am #18793
Thank you Professor Herbener
When I consider that the capital investment/expenditures are counted in the GDP, the difference between GO and GDP is going to be the cost of producer goods used in his processes and the value of his products. Obviously the GO is going to be a much bigger number. I don’t see what the excitement is about.
I guess there would be fluctuations because of a buildup or paucity of inventories in the capital goods producers. Which I guess could be used for forecasting.September 3, 2016 at 10:58 am #18794
Because business-to-business sales are a multiple of consumer-to-business sales, the bulk of economic activity in the economy is not included in GDP. Consumption is not 70% of the economy (it is 70% of GDP) and therefore, stimulating consumption via fiscal and monetary policy is unlikely to bring an economy out of depression or lead to economic growth. Macroeconomic problems are likely caused by production aimed at satisfying business-to-business sales and not production to satisfy consumer-to-business sales.
- You must be logged in to reply to this topic.