The Spudmeister tries economics

I was asked this morning whether it mattered that UK GDP might be 25% down this quarter.

My answer to the question was that in principle it did not. GDP is a measure prepared in three ways. For the current purpose the important fact is that it reconciles measures based on both production and sales. And the reality is that both are going to be down by a staggering degree right now. But because both are down, and we know why, it could be argued that this is of little consequence, in itself. It could be considered a blip, but only on the basis fo making one massive assumption. And that is that productive capacity survives this.

Err, no.

GP is any one of the three of all production, all consumption or all incomes. All three are, by design, equal to each other. So, a 25% decline in GDP means a 25% decline in consumption. It cannot be any other way.

This matters.

This man used to teach economics at a British university.

Sigh.

9 thoughts on “The Spudmeister tries economics”

  1. I can confirm by observation that “Dick” Murphy’s consumption of viagra is, if anything, increasing in these troubled times. Of course, this is not going to outweigh the general reduction in expenditure in the rest of the economy

  2. @Tim – of course you are right about the national income identities. But part of what most non-economists think of as ‘consumption’ is being maintained through drawing down inventories (negative investment) right now.

  3. Dennis the Essential

    This man used to teach economics at a British university.

    No, he used to occupy space at a British university.

    You cannot teach what you do not know.

  4. So he’s saying a 25% in incomes isn’t important, just a blip.
    Still at least even dense as he was he got the big assumption being how much of the productive economy will be left after this, though he was then stupid enough to assume all of it.
    Saw some numbers 2 weeks ago that 1 in 10 restaurants will never re-open and that even the big chains could see this as a good time to cull less well performing sites which would push numbers even higher. Give it another month and that number will be much higher.

  5. Newmania will be having caniptions (sp?).

    Think what this will do to mask the effects of the Brexit catastrophe…

  6. What about a reduction in investment or transfer from capital stock to consumption? So you eat your reserves or let your buildings crumble so that consumption temporarily exceeds production.

  7. @Tim Worstall

    Most private sector not working and not being paid, while entire public sector working and being paid + overtime

    Will this result in a huge uplift in UK productivity figures?

  8. The issue now is hoe to get this POS lockdown off. If loads of us ignore it then small businesses might just re-open.

    Blojo and the gang seem paralysed –just sitting there like King Log–oblivious of any danger. If haulage industry should collapse–or even have sig shortfalls in a few places–then gathering panic could push us into some VERY bad spaces indeed.

  9. So if a 25% drop in GDP is irrelevant, then he’s arguing that a reduction in GDP to zero is also irrelevant. As I always say: you go first.

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