47
Trade creates value.
Previously, Kate preferred spending \$50 on food at Alice's restaurant (rather than cook her own food). And Alice preferred spending \$50 getting her hair cut at Kate's (rather than cut her own hair). That Kate must now cook her own food and Alice cut her own hair means that value has fallen (where value is broadly defined as the degree ...
19
Both Alice and Kate have bills to pay, regardless of whether they are earning money or not. Restaurants and salons have to pay rent and maintenance on their properties whether they are in business or not. They both need to feed themselves and possibly their families whether they earn income or not. They need electricity and water and other utilities in ...
16
When we import something, we consume it. So when calculating consumption we are bound to count import as a positive component of GDP. Since it is not (we did not produce imports domestically), we subtract it to make it neutral.
13
Trade is good because it creates efficiency. Alice has invested in her kitchen and knows the supply chain of ingredients, and due to the efficiency of her business, she can sell a meal for $50. If Kate wants to cook the same meal, she'll have to buy all the necessary equipment and ingredients, and spend time learning cooking techniques, and by the end, she'...
11
There is only a change in GDP to the extent there are market goods and services used in the sale and only those goods and services are counted. The actual sales revenue are irrelevant. For example, the home inspection, appraisal, brokerage fees, and, I believe mortgage closing costs, would be in GDP. If you and your sister swapped houses in as-is condition ...
11
Gross Domestic Product
As per wikipedia, we learn that the OECD, an organisation of international recognition for economic policies and macroeconomy, defined the GDP as
Gross domestic product is an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production (plus any taxes, and minus ...
11
As you have pointed out: where it comes from is very important. As to the Japanese situation it is quiet different from the US position from example. In fact most of the Japanese debt is owned by Japanese people (90% of the current debt). More specifically the BoJ plays a big role as a buyer, and puts pressure on Japanese yield, which makes it cheaper for ...
10
Purchasing new homes would count as an investment. According to Blanchard et al. Macroeconomics: a European Perspective pp 568 in glossary investment is defined:
Investment (I): Purchases of new houses and apartments by people, and purchases of new capital good (machines and plants) by firms.
The source above is the leading undergraduate macroeconomics ...
9
This happens all the time and is normal. It's due to measurement error. It is hard to measure these things in real time and as time goes by more data comes in, which allows measurement of GDP and other macroeconomic variables to be better so they are revised. Sometimes the revisions can be quite large. Typically the latest data is also the least reliable.
...
8
In 1991, when the Bureau of Economic Analysis made the switch from GNP to GDP as "their primary measure of U.S. production," they indicated the continued importance of GNP this way:
GNP, however, continues to be a useful concept. Because it refers to the income available to U.S. residents as the result of their contribution to production, it is ...
8
You assume that higher spending causes higher GDP. This is not necessarily true.
Saving income will increase GDP through investments (unless you're in a Keynesian trap). Think about the most standard growth model, where the future (and steady state) GDP increases strictly in the savings rate.
Hence, whatever increases the savings rate (in your toy model, ...
8
Usually GDP growth rates are publicly talked about in real terms but not per capita, see for example World Bank where, above the relevant table we read
Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2005 U.S.
dollars. GDP is the sum of gross value added by all resident producers
...
8
I don't think you can sensibly discuss this without including two additional factors:
what is the prevailing interest rate?
is the debt in local or foreign currency?
The first affects the cost of repayments. Interest rates are at record lows in the developed world. How much money is it reasonable to borrow at 0%? What about -0.1%, is there even a limit ...
7
One way to navigate rather safely in National Accounting Identities, is to put on the one side "what you have available" and on the other side "what you do with it". In the specific case ($M$ being imports) we would have
$$GDP + M = C + I + G + X$$
"What we have available" is what we produce and what we import.
"What we do with it" is a) consume it b) ...
7
The change in base year keeps the dollar values meaningful to contemporary readers. If we still used, say, 1900 as the base year for US GDP, the dollar values for today would be so tiny they would essentially be meaningless 'GDP units', which would make it harder for people to visualize what the numbers really mean.
Note that, when the base year changes, ...
7
It depends on what you mean by "sustained growth" and "flourishing markets".
Clearly the Earth as a whole is a big market. If you do not look at human made borders: the global economy is currently growing and some would say it is flourishing. There is no physical reason why this could not be done without the borders.
There are areas where the current ...
7
Most people aren't Alice and Kate.
GDP is a measure of the total goods and services produced within an economy. The point is measuring total production, not measuring how much money is changing hands.
There are a couple of things going on here:
In the example you mention of Alice and Kate, there is presumably some reason why they were paying each other ...
7
Let's consider another example. I'm an automotive manufacturing service engineer; I build and repair machines that are used to build and repair cars. I use the money I earn to buy a variety of things, including, say, gasoline.
Of course, if all of the automotive manufacturing service engineers stop working, that's no big deal. People can just build their ...
6
There is a large literature considering the depletion of natural resources, including fossil fuels, in relation to GDP. Some writers explicitly refer to such resources as a kind of natural capital. Others may refer to natural resource assets, or simply to natural resources. A key question within this literature is whether depletion of natural resources ...
6
There's a bit to unpack here.
Consistent wage growth seems in line with rising GDP. So does a steadily falling unemployment rate.
For other economic measures, the stock market is a whole other animal. It often responds to outside global events that aren't solely economic in nature. It may also be affected by the Federal Reserve's desire to steadily ...
6
Yes.
1. You seem to believe that goods and services that are not exported may not be counted.
This is false. (Almost) all goods and services are counted, even if they are not exported.
2. The only exception is (intangible) services produced for one's own consumption.
Examples: Mowing one's lawn, making one's meals, and cleaning one's home are not counted ...
5
What you're describing is a change in the capital account, not in GDP. They're related through the balance of payments, in that if a country is running a current account deficit (usually arising through being a net importer), they'll have a capital account surplus (i.e., foreigners will on net buy more domestic assets or domestic owners will be net sellers ...
5
While this is too broad a field and any study done on this would involve an extent of speculation. However the work by Berg and Ostry in this work have concluded the following
Do societies inevitably face an invidious choice between efficient production and equitable wealth and income distribution? Are social justice and social product at war with one ...
5
The question itself has merit, but isolating the variables seems tough to me.
The beginning of such a study would start with the Gini coefficient which is a numerical method of determining income distribution with a single number. You'd then seek to correlate Gini with a country's per capita GDP.
As a thought experiment, we'd agree that having a select ...
5
It helps to write out things as (simple but) proper equations. Denote production as $Y$ and prices as $P$
It is given that
$$Y_{t+1} = 1.1 Y_t \\
P_{t+1} = 0.9 P_t$$
Nominal GDP is given by $P_t Y_t$
$$ P_{t+1}Y_{t+1} = 1.1 Y_t \cdot 0.9 P_t \\
= 1.1\cdot 0.9 \cdot Y_t P_t$$
So nominal GDP changed by $1.1 \cdot 0.9 = 0.99$ - it dropped by one percent.
...
5
It's complicated, and it is supposed to depend on where the ships are generally operating from, rather than the country of the firm that owns the ships or the flag under which they are flown. Under the 2008 System of National Accounts (the international standard for calculating GDP), overseas shipping is generally to be allocated on the basis of the ports ...
5
@BB King's answer is good, but I want to make one point very clear:
The Fed did not change the data.
The Bureau of Economic Analysis revised the data as a part of its 2013 comprehensive revision process, which it engages in every five years using data from the most recent Economic Census.
It may be worth noting that the BEA, which is the agency that is ...
5
You are correct in pointing out the flaws of GDP. But honestly, it's the best we have came up with; measuring the stock of wealth is just impossible.
You say you can estimate the value of your own assets, and of course it seems that way. We all feel that way, until we actually try. How much is your cellphone worth? Easy to know, go to ebay and look for ...
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