QUESTION 1 : The GDP (gross domestic product) is a wondrous thing! A great creat

Question

QUESTION 1 : The GDP (gross domestic product) is a wondrous thing! A great creation of hope over facts! There are no concrete numbers. Everything is at best a guess! There is no way that we can accurately say how many pairs of shoes---as an example---were sold within one year. Even if we could do so, how do we know the average price of a pair of shoes let alone know the total value of all shoes sold? When I attended the U. of Minnesota, in the dark ages, it was called gross national product and professors mostly ignored it. They only mentioned it in passing. None felt that it was worth more than a mere mention as it proved nothing about the wealth of a nation or the nations wellbeing. However, now that most of the so-called industrialized nations are using the same methods to construct the model, I suppose it has some value. If everyone tells the same lies the same way at least we know where the problems, the lies (no pun intended!) are. I am still very suspicious as several countries---China chief among them---are continuously cooking the books. In my humble estimation, the GDP would have more value if Government was left out of the equation. The government is the single largest consumer of goods and services. The problem is that the government has no money! It gets it's money by stealing---sorry!---taxing it away from us. This leaves us unable to buy some of the goods and services we need to satisfy our needs and wants because government consumption drives up demand and therefore prices. It reduces our consumption. They are in competition with us for the countries wealth and they try to dictate how that wealth should be used. But don't I know best as to how to spend my money? Surely better than the government? Then again, why do we need such a large government? For over 125 years we muddled through without them! Did I mention that I am no fan of a vigorous government? If you want the GDP to go up, increase government spending. This adds nothing to the productive value or the base worth of the countries assets. It is mostly a drag on growth---a form of mal-investment. The government thinks you are not capable of running your own life or spending your money wisely so the government will do it for you. Do you believe government spending should be included in the GDP? Why or why not? There are 2 embedded questions. The price of liberty is eternal vigilance. Thomas Jefferson QUESTION 2 : There are mainly four things that are used when interpreting the GDP data. They are the APC (average propensity to consume), the APS (average propensity to save), the MPC (marginal propensity to consume), and the MPS (marginal propensity to save). The former are interesting but not much used. The marginal measures are supposed to be the more important. They measure the changes in MPC and MPS from year-to-year to indicate either a growing, shrinking or stagnant economy. Average propensity is said to measure consumers' willingness to consume or save each year. The marginal propensity measures the spending and savings habits as they change from year to year. Keynesians are fixated on spending but I maintain savings is the most important measure. Why? First, savings are nothing more than than consumption deferred. You cannot have production without savings. The capital for expansion must first come from a pool of savings provided by individuals who are deferring spending to some future point. From this pool business can draw the capital they need to grow. So then, I believe, savings must have a multiplier of at least one. Keynesians consider it a leakage from the system. Food for thought. Should savings be considered when calculating the GDP? The MPS is also the basis of the GDP multiplier. This is said to be the measure of many times each dollar is spent in the economy in one year---an interesting concept. The GDP multiplier is a reciprocal which means if you save more the multiplier goes down. If you save less the multiplier goes up. Some in government would have you believe that for every dollar spent by the government it creates $1.74 in total spending. Really? Wouldn't a better measure be to take the C, consumer spending, add it to Ig, business spending, and then dividing it by the GDP. This would give us not 1.74 times each dollar is spent but rather approximately 0.74 times. The other 26 cents is administrative costs. If that be so, why then do the powers in Washington want to send every CEO in private business (or health insurance industry) to jail if their administrative costs exceed 8 percent? The whole GDP model is riddled with holes of estimates, approximations and---dare I say it?---lies. Perhaps I should say half truths. Right now a certain Asian country is said to have a nearly 6% GDP growth. But how? Exports are down. Imports are down. Financial failures by companies and banks are soaring. They have empty (zombie) towns, roads that go no where, etc.. Not to forget rail lines that are not being used because ridership is down.They have a relatively high unemployment rate, at least in the hinterlands. These things are not possible if the true GDP growth was 6 percent. All this reminds me of Sun Rail which was supposed to be the engine (no pun intended) driving a new Central Florida business growth cycle. Fares barely cover 20% of operating costs. So where does the money to operate the system come from? Taxes paid by residents of the counties that Sun Rail traverses. Taxes! Oh no! Really? Is government supported public transportation worth the expense? Are there other alternatives? It is not my intent to persuade you to think like me. God knows there's only room in this world for one of me! I just want you to think! Never blindly accept what someone says. Examine everything. Be a skeptic! Better yet be a curmudgeon! Just in case you don't know what a curmudgeon is, a curmudgeon is someone who sees a dark cloud in every silver lining. My boyhood hero was H.L. Mencken. I wanted to replace him as America's number one curmudgeon when I grew up but P.J. O'Rourke beat me to it! There are 7 embedded questions. Is it possible to accurately measure a nations total output and then express it in dollar units?

Explanation / Answer

Government spending should not be included as a component of the GDP as it is a misleading indicator of the true economic health of a nation. While measuring the economic health of a nation, there is an inherent bias in favor of the government spending. For instance, if in one quarter the government cuts back on its spending or keep its spending constant, then the nominal GDP would decline however, if in another quarter, the government spending was increased then the nominal GDP would also increase. This gives an opportunity to the politicians during times such as that of elections, in which the government may borrow more and then spend more to show an increase in the economic growth of the nation. So the problem is that government does not really produce anything, it only borrows and consumes and borrowed money cannot be considered as an income. The more the government spends, the more resources it has to take from wealth generators. This subsequently undermines the wealth generating process of the economy. Hence, considering government spending as part of the GDP, distorts the real picture of the economy.

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