[brettcaudle711]

What does this quote mean in regards to Dr Woods’s latest blog post concerning Consumer goods vs producer goods?

“leaving out all these stages vastly inflates the portion of the economy represented by consumption.”

[jmherbener]

Gross Domestic Product includes only final goods produced, i.e., goods in the hands of their final users. Consumer goods make up 70 percent of GDP while Investment goods make up 15 percent.

GDP does not include intermediate goods produced. For example, the production of cars are included in GDP, but the production of iron, steel, rubber, tires, and so on are not.

Obviously, consumption is a much smaller portion of overall production than it is GDP. Treating GDP as overall production in the economy exaggerates the importance of consumption to overall production in the economy.

[brettcaudle711]

So then, if I understand this right, wouldn’t a more effective method of measuring our wealth just be consumer spending minus production spending? Or is that too simple?

[jmherbener]

Standards of living refer to the quantity and quality of consumer goods we have. We are wealthier if we have more and better consumer goods. We have consumer goods produced in the past and newly produced consumer goods. The spending on newly produced consumer goods during the year is consumption expenditures (C). Consumption expenditures are included in GDP. So C does not indicate our wealth. It only refers to additional consumer goods purchased this year. It also does not tell us the quantity and quality of consumer goods, but only how much was spent to buy them. So C can be larger without the quantity and quality of consumer goods rising.

[brettcaudle711]

Thank you!

[Author]

Posts