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Jeez, can’t even get GDP right

Then there is the problem that GDP assumes that everything paid for with money is of equal worth. So, the surgery that saves a person’s life has the same value as a gambling website. Is that true?

No, it ain’t. Because we do not measure the money of the gambling, or the surgery. We measure the value add of them. Because that’s what GDP is, not monetary transactions, but value add. So, if people value gambling – which some indeed do – then that’s the value we measure within GDP. Just because this is how we do it – output value minus input costs, thus value add.

20 thoughts on “Jeez, can’t even get GDP right”

  1. So, the surgery that saves a person’s life has the same value as a gambling website. Is that true?
    Welcome to the real world.
    People don’t give a monkey’s about the life of a person they’ve never heard of. They do like on-line poker. It’s a trade off they’re more than happy to make.

  2. Value – is different things to different people, so how much they will pay is dependent on this and personal priorities. See: an auction, and alcoholics/drug addicts who prefer to spend money on their addiction rather then food or rent. So how do you measure the subjective, objectively?

    The problem with State-run anything… NHS for example… there is no price system, so there is no way to minus the input value (cost) from the output value (profit). In any case nobody in the NHS actually knows the input value (cost) of a surgical procedure or any activity. All we know is the aggregate input value (cost) of the NHS and in the absence of pricing, it is assumed the output value (profit) equals the input. So whenever Government increases NHS spending, this increases GDP… Hurrah! even if, as those of us with longtime experience of the NHS know that what you get out is consistently considerably less than goes in, waste and inefficiency being profligate.

    So perhaps time to calculate GDP minus all Government spending on itself? Or maybe stop bothering with GDP because what difference does it make to anybody?

  3. . . . output value minus input costs, thus value add.

    Sounds a bit like profit. Is that what’s being measured?

  4. It’s not exactly the same, no, but it’s moving along the same lines. Comparing GDP to corporate accounting cannot be done accurately, but roughly it’s profits plus the wage bill equals GDP contribution.

  5. Aside: I saw a car the other day with the registration NT0 5PUD, with exactly that non-standard spacing. It was also a much newer model than 2005, so clearly an intentional private plate. I immediately read it as “not spud” and wondered if the owner had previously been mistaken for someone and wanted to avoid a repeat of the incident.

  6. . . . roughly it’s profits plus the wage bill equals GDP contribution.

    So the wage bill is an input cost for calculating profit but then you add it back on top of the profit and that’s yer GDP?

    Maybe I need to say that in a Peter Griffin voice for it to make sense.

  7. One way to calculate GDP is “all incomes in the country”. Incomes equals consumption equals production. So, the two incomes from a company are profits and wages…..

  8. Dennis, CPA to the Gods

    Then there is the problem that GDP assumes that everything paid for with money is of equal worth.

    Isn’t this Murphy’s Tuesday definition of GDP?

    It’s hard to keep track of these things.

  9. But there’s still some wooliness around this term “value”. Above you say:

    So, if people value gambling – which some indeed do – then that’s the value we measure within GDP.

    But we don’t measure how much people value gambling, we measure (specifically but roughly!) the profit of the gambling operation along with their wage bill. The most you could say is that the GDP total from gambling operations gives some indication that some level of gambling has some level of value to some number of people (and in GDP terms, maybe that’s fine enough). There’s no information on the quantity or spread of bets, the “honesty” of the bets, the number of gamblers, or the time spent. It could be three Asian billionaires dropping their fortunes on rigged games or thirty million grannies playing bingo. GDP can’t tell us.

    How do we measure the GDP of NHS surgeries? The NHS is an operating loss plus a fucking enormous wage bill. Add up surgeon salaries, divide by the number operations, minus the cost of lawsuits? Should GDP measure if surgeries are on tax payers vs benefits claimants? Cos surely success on the former group makes us richer than on the second group?

    And if each country measures its own GDP, we know the French are cheating, right?

  10. As best we can we do this at market prices. Because, by definition, the amount that folk voluntarily pay is the minimum they think is the value, to them, of that thing. Cool. So, how much of that payment is simply the same as the alternative uses of cement – just to use one specific product? If the value in this use is exactly the same as the value in use of all other cement everywhere then this specific use of cement isn’t adding value, is it? But if we’re willing to pay wages, or produce a profit, from what we’re willing to pay for this specific use of cement, right here, then we’re adding value in this use of cement.

    The NHS it does fall down, yes, because we’ve no market prices. Government spending is valued at what government spends, not the value received from the spending. A known problem with GDP.

  11. Isn’t there some variation between countries as to how government spending is accounted for in GDP figures?
    I seem to recall lots of shrieking about how the UK’s GDP fell off a cliff compared to others during the pandemic. But that was because as we counted closing the schools etc. as a loss. (And then our GDP shot up when they reopened as the opposite effect)

  12. Pjf consider the term “value added”. It’s the profit from basic inputs. To calculate gross profit you take Sales price less cost of goods sold. Which calculation of gross profit takes wages, even direct wages into account?

  13. You see, you can’t trust these economists. Every time you pin ’em down, they start talking about concrete. It’s a rigged game, I tell ya.

  14. We changed it, then and only then. We were right as well, but the rest of the world didn’t follow. Outside that one instance everyone is supposed to do it the same way. The EU even had detailed rules for all members (on the logical grounds that EU contributions are a set percentage of GDP)

  15. How about thinking of it as the return to the factors of production – capital and labour? So it’s revenue minus labour and input costs. You could also include depreciation.

  16. IIRC the EU demanded that national contributions be based on GDP including the black economy. The UK civil service did some work and produced a sensible estimate, whereas the Frogs and Dagos just said “it’s 1%” (ROFLMAO). As a result, the UK’s contributions went up.

  17. GDP measures cost – not value. At least in a reasonably free competitive market.

    Suppose there was a widget that people valued at $100, and they could currently buy for $90, because the cost to supply is $80, but someome figures out a way to make it for $50. Then the new source will make it and sell it below $90, reducing the price. Other potential competitirs will see this and use the new method, eventually driving the price down to $50 plus some profit. GDP will reflect the final sale price, so is based on cost.

    In the public sector this is recognised – the contribution to GDP from things like publicly funded education, medicine, etc is explicitly their cost. It’s only in the private sector that we get this fantasy that it reflects value.

  18. Snigger.

    No, we start by defining “value” as what people are willing to pay for it. We agree that there is also the consumer surplus. The amount people would be willing to pay but don’t have to. But value is what people are willing to pay. So value of all final production at market prices is GDP.

    This is not perfect, of course it isn’t. However, say we were to take cost as the value. Imagine. That would mean a British Leyland car was of more value than a Honda. Because it cost more to produce. That would be mad, of course.

    Gets worse when we apply it to the public sector. The value of a diversity adviser is their cost of employment? Really? Not a negative value from that?

  19. If “value” is what people are willing to pay, then it is not measureable – we can only measure what people actually pay. Even in an auction we only get to find out what the losers are willing to pay – the winner might have been willing to pay more or the winning bid might have been their limit.

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