Is the economy really twice as large as we thought?

Since the mid-20th century, economists, governments, businesses, and just about everyone else has used gross domestic product (GDP) to measure the size of the economy. But is it thebest metric for the job? Some economists are saying no.

GDP is a measure of the level of spending on finished goods in the economy. It is a measure of final production. If a pencil sells for 50 cents, it increases GDP by 50 cents. But a good deal more spending tends to occur in the process of making a pencil. At the very least, the manufacturer has to acquire resources to make the pencil — someone must harvest the wood, someone must harvest the rubber, someone must mine the graphite. Under GDP, that spending is not directly included. It is only counted implicitly when the finished pencil is produced and purchased by a consumer or business.

Some economists, such as Chapman University’s Mark Skousen, argue that the intermediate stages of production lower down the production chain should also be included in measurements of output. While they recognize that including them again explicitly can mean double counting or triple counting, they argue that there are “several reasons why double counting should not be ignored and is actually a necessary feature to understanding the overall economy.” After all, lots of businesses deal solely in intermediate goods. Intermediate producers buy partial products, add a “bell and a whistle,” and pass them on. At Forbes, Skousen argues that “no company can operate or expand on the basis of value added or profits only. They must raise the capital necessary to cover the gross expenses of the company — wages and salaries, rents, interest, capital tools and equipment, supplies, and goods-in-process.” To Skousen that means that a measurement of output should take all this spending into account.

Perhaps taking heed of some of these arguments, the Bureau of Economic Analysis starting on April 25 will release each quarter a measure called gross output that includes total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. 

Read More At TheWeek.com

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5 thoughts on “Is the economy really twice as large as we thought?

  1. I don’t think it’s any news that the GDP and other similar measures fail to count many, many important things. Some are probably uncountable, like vernacular production, familial child care, volunteer work, and so on.

  2. Like the hedonic modifications on the rate of inflation, this additional distortion is just more lipstick on a drowning pig.

  3. I’m sure the bean counters would love to ‘discover more GDP’. They could then attempt to justify higher taxes. My personal opinion is this would be an unfortunate development. Does the ‘black economy’ help or hinder a country? More importantly, do the average Gills and Joes benefit or suffer because some sectors escape counting or taxation? . Peter has already been robbed enough to pay Paul. Leave the calculations as they are unless the new thoughts suggest that lowering the tax burden of workers is the way forwards.

  4. I do not get it. If a pencil costs 50 cents at retail we can assume that all the people and products used in the production of the pencil have received their cut. If a business simple makes the paint that it supplies to the pencil maker and has salaries and buildings and other costs, we can assume that this has come from the retail value of the pencil.

  5. Not clear what the advantages really are to supplant the current measure of GDP.

    Would the one proposed not be highly correlated to the current?
    Would the delta be sufficiently informative to help us improve our decisions?

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