But yes, he does:
There are three incompatible approaches to estimating GDP.
One is called the output method, which, unsurprisingly, measures what is produced in an economy during a period.
Another is called the income method, which again, unsurprisingly, measures the income in an economy during a period.
And the last is called the expenditure method. In reality, these all produce different answers, which are forced into one headline number.
They are not incompatible. They should – if measurement is accurate – all be the same. But Hayek, the centre, details – plus people lie – mean they will differ. But conceptually they’re all measuring exactly the same thing just in different ways. But then:
The trouble is that if we take those four items, consumer spending, investment, government spending, and net exports or imports, there is a critical flaw because this simply measures spending flows and not the income or benefit from whatever has been spent upon, and that is fundamental and why GDP is absolute nonsense.
But those four are, by definition, equal to all incomes in the country. And if we want to look at incomes we go look at the other calculation method of the same number and examine it that way.
Because production = incomes = consumption. By starting definition.
Man’s a loon. Just cretinous:
For example, the figure for investment ignores the time distortion that is obviously inherent in investment spending. If you spend money on an investment item, call it your car, call it the purchase of a new factory, call it whatever you will, you don’t expect to get all the benefit today. Very clearly, the expenditure is incurred with the intention of realising the gain over a number of years. If I buy a new car, I want it to last for 10 years. I know not everybody does, but the point is that’s my expectation. And if I was to buy business equipment again, I want it to last for several years, and that, however, is included in GDP as an item of expenditure at the time it’s incurred and that, of course, does not therefore provide a true reflection of what the income of the country is in the period in question, because we have immediately distorted the figures and that has a consequence.
Again, we look at that in the income calculation of GDP (accurately, via AI: “Depreciation, or consumption of fixed capital, is included in GDP as part of the “gross” total, representing the value of machinery and buildings worn out during production. It is specifically added in the income approach (as part of net operating surplus or as a separate component) to represent the replacement cost of capital.”).
And yes, he goes on:
And there is a whole failure in this logic in macroeconomics with regard to GDP measurement. There is actually what I would call a category error with regard to GDP calculation because there isn’t what I would call a capital maintenance concept inside GDP, and that’s for one very simple and straightforward reason. If you look at any larger business, you will find it has a balance sheet, a figure of how much is invested and what it is invested in by the business in question. There is no national balance sheet used in the calculation of GDP.
That’s in the income method, as above.
Or, if he wants to talk about degradation of natural resources etc that’s fine. that’s in Net – Net Domestic Product, Net National Income and so on. These calculations exist – they’re just late because they’re difficult to measure.
If we were to have a figure that reflected the benefits of investment and the benefits of past investment and adjusted for both of those, and also had a sensible calculation of what is investment and what is not, so that training, for example, might be treated as an investment cost, because it is, because the benefits accrue over time, then we could end up with something so much better with regard to GDP, but we don’t.
As most economists would agree we probably should be using Net National Income. It’s just that it’s a bugger to calculate. We need to see corporate accounts before we cxan do it for example. So, 18 months after year end before we get even the raw information. Not wholly useful that.
Shit:
Oil spills raise GDP.
No, they don’t.
Cleaning up oils spills increases GDP. Which is appropriate as cleaning pollution up is adding value. The problem with GDP is that the oil spill is not reated as a negative. Which, given that the oil spill is a capital, not income, event is logical if not terribly useful. The oil spill will turn up as a negative in any of the Net – not Gross – calculations. See above for the difficulties with those.
GDP ignores who gets the income.
Nope, the income measure of GDP is only about who gets the incomes. He seems to think that GDP is something different from GDI. It isn’t, it’s a different way of measuring the same thing.
As ever he’s pontificating about something without showing any evidence of having the first clue.
Shoot the AI. “Depreciation … representing the value of machinery and buildings worn out during production.” Balls. Your computer hasn’t depreciated because it’s “worn out” but because it’s become obsolete e.g. too slow, not enough memory, won’t support the right software, or whatever.
Your building isn’t worn out, it’s just the wrong building, or in the wrong place, for what you want to do next.
AI does man-in-the-pub economics.
My computer doesn’t need replacing because it’s slowing down. It need finding whatever basterd is running in the background consuming resouces and slowing it down routed out and shot. And websites such as Facebook where….. it…… pauses….. after… every…. bloody….. keypresssss….delete…..delete…..
Depreciation is the reduction in value of capital equipment during the year and is included in the “operating cost” part of the P&L account. If someone else has made your process redundant then depreciation can be as much as 100% of the excess over scrap value even if it is in perfect condition. In the majority of cases depreciation is the effect of wear and tear.
There is also “amortisation” which is the gradual reduction in value of intangible assets. Does Murphy even mention this?
Ideally he wants a version of GDP that only includes activity that he considers “worthy”.
Yep. That’s what ‘GDP ignores who gets the income’ is all about.
So do I. I want one which measures actual wealth creation, not wealth redistribution or maintenance. That, of course, would exclude most activity that doesn’t involve actual production of goods and services. Most of the public sector? ‘Bye.
Cleaning up oils spills increases GDP. Which is appropriate as cleaning pollution up is adding value.
No it isn’t. It’s restoring value. As Thomas Sowell points out, medicines and mobility aids for the elderly and infirm improve their quality of life, but do not make it better than that of those who don’t need them, or even of those same people before they needed them. They don’t create more wealth for them. They merely preserve some that would otherwise be lost.
Cleaning up oil spills is environmental maintenance, which is a cost just like all other maintenance is. It uses some capital to preserve the rest.
GDP is useful as a fag packet estimate of the state of the economy and the fact that it can be calculated in 3 different ways is useful as a sense check. The mistake, as pointed out by Cowperthwaite, is to use it as a tool to manage the economy
GDP is a rubbish tool, but as our host points out, its advantage is that it’s swiftly calculated. If applied to a single economy (or monetary area, exchange rate movements bugger up comparisons) that isn’t changing too drastically, it’s telling you something by the rate at which it’s increasing or decreasing. But what that something is may not necessarily be obvious.
True, but the more fundamental mistake is to try to “manage the economy” at all.
An ongoing failure to understand metrics and models and why they’re used. It’s like looking at an Airfix model jet of a fighter and complaining that it’s not as big as the original.
All those DEI jobs in the NHS, those civil service pensions, those covid enquiries, windmills, solar panels… are components of GDP.
Bloody hell, lads, we’re rich! we’ve hit the jackpot! MOAR!
By his argument almost the entirety of govt expenditure should be excluded from gdp as its a waste of money.
Quite. Any complaint about how GDP is calculated, and the problems inherent in all the various models that forgets to mention the elephant in the room (that government spending is assumed to raise GDP by the amount spent, regardless of whether it produces any measurable positive output) is either an idiot or an ideologue, or both.
For example, the figure for investment ignores the time distortion that is obviously inherent in investment spending….etc etc
Good grief! He’s discovered present time utility value of assets. Having been denying it for as long as I can remember.