[rt]

On Wikipedia it says: “Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time.” Some people argue that government spending increases GDP. Thus an increase in GDP does not necessarily reflect the well-being of an economy because GDP figures ignore the negative effects of government spending. Is this true? And if yes, why does government spending increase GDP?

[jmherbener]

GDP = C + I + G + (X-M)

Gross Domestic Product is equal to the sum of Consumption Expenditures, Investment Expenditures, Government Expenditures and Net Exports. The Final Goods included in GDP, then, are goods in the hands of final users: Consumer Goods bought by consumers, Capital Goods bought by entrepreneurs and held by them as assets, Government Goods bought by government officials and Net Exports.

There are two omissions to note. First, GDP does not include the production of intermediate capital goods. So to produce automobiles, which would be included in GDP, iron must be mined, steel must be made, fenders must be formed, and so on. None of the production of these intermediate capital goods is included in GDP. Second, government transfer payments are not included. So, fiscal expenditures for F-18s are included in GDP while social security payments are not.

Yes, G adds dollar for dollar to GDP. So, when the federal government increased its annual fiscal expenditures from $2.9 trillion to $4.0 trillion in 2009, GDP was $1.1 trillion larger than otherwise.

The argument about including G in GDP is that since G are financed by coercive extractions, the prices paid for government goods do not, and cannot, reflect the value people place on them. So adding G to C and I is like adding apples and oranges. Even though they are both denominated in money, government expenditures and private expenditures do not have a common meaning.

[derosa8]

“None of the production of these intermediate capital goods is included in GDP.”

They aren’t counted as investment expenditures? As in, company X spends (invests?) 2 million dollars in new mining areas.

[jmherbener]

Investment counts only if it’s for assets held by the entrepreneur and used by him in production. If an auto company builds a new factory or buys new equipment, it’s included. But the tires, paint, steel, and all other intermediate capital goods the company buys are not included. Intermediate capital goods are not held by the company as final user, but pass to the next stage of production.

[jfgleason]

Would be curious to see if anyone has conducted a study of correlation using C+I+(X-M)-G and unemployment rates. In other words if calculating government expenditures as a negative due to their crowding out effect in the private sector would lead to low unemployment in times of higher levels of C+I+(X-M)-G. Excluding times of war when we had a draft due to the special circumstances involved.

Seems to me to not only be comparing apples and oranges, but comparing private citizens planting apple trees and the government chopping some of them down to plant orange trees because central planning knows best. Every time.

[derosa8]

Professor Herbener, you said, “Investment counts only if it’s for assets held by the entrepreneur and used by him in production. If an auto company builds a new factory or buys new equipment, it’s included. But the tires, paint, steel, and all other intermediate capital goods the company buys are not included.”

I’m still a bit confused. If buying new equipment is included, then wouldn’t the equipment used to erect a new factory be included in “new equipment”? It just seems that it would be awfully difficult for people calculating the statistic to determine whether equipment is directly related to the function of the business or whether it is an “intermediate capital good.”

[jmherbener]

Intermediate capital goods become part of the output that is sold to the next stage of production. So, the entrepreneur does not retain possession of intermediate capital goods. When he sells his output, they go with it. But he retains ownership of his plant, equipment, improved land, and other assets. Even though some portion of them are used up in production (and he depreciates his asset values to account for that), he retains possession of them when he sells his output.

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