GDP: A Brief but Affectionate History by Professor Diane Coyle offers an interesting popular history of the concept of gross domestic product (GDP). GDP is a mental construct, and is the result of somewhat arbitrary decisions. The book discusses the history of the idea, tied in with economic history as well as the history of economics.…
GDP is one of three aggregates that are theoretically equal to each other (in practice, there is a statistical discrepancy, since they are based on three different input data sets).
- The sum of all production in the domestic economy.
- The sum of all expenditures in the domestic economy.
- The sum of all incomes in the domestic economy (Gross Domestic Income, or GDI)....
I believe that a lot of the kvetching about GDP would disappear if we got rid of it, and replaced it with Gross Domestic Income. Since the two values are theoretically the same, we would be theoretically in the same boat. However, economists would be less hung up on their theoretical preconceptions....Bond Economics
Book Review: GDP
Brian Romanchuk
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A tale of three accountants
Comment on Brian Romanchuk on ‘Book Review: GDP’
Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market clearing holds, that is, quantity sold X = output O, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.
At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers, which are shown in the form of accounts on Wikimedia.
(a) National accounts, pure consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.
https://commons.wikimedia.org/wiki/File:AXEC94.png
The accountants are pleased that their respective numbers are exactly equal. This means that both have captured reality, that is, every single transaction in the period under consideration.
Before they depart they sum up loosely: The sum of all expenditures in the domestic economy has been equal to the sum of all incomes.
At the end of the second period, they meet again at the Honest Accountant Bar and compare their numbers. This time they have:
(b) National accounts, consumption expenditures greater than wage income, C>Yw.
https://commons.wikimedia.org/wiki/File:AXEC95.png
The accountants are again pleased that their respective numbers are exactly equal but this time their accounts show balances.
Says Mr. B, I call my balance profit or loss, as the case may be, more specifically I define monetary profit as Qm≡C-Yw.
Well, says Mrs. H, I call my balance saving or dissaving, as the case may be, more specifically I define monetary saving as Sm≡Yw-C.
Then they calculate their respective balances and find out, to nobody’s, surprise that Qm=-Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise.
Before they depart, they sum up loosely: The sum of all expenditures in the domestic economy has been greater than the sum of all incomes and accordingly the profit of the business sector has been equal to dissaving of the household sector.
See part 2
Part 2
Next day, the two accountants hand their numbers = Figure (b) over to the economist. Says the economist, hmm, for my purposes I have to rearrange the accounts, after all, profit has to be treated as the income of capital analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does not realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income.
https://commons.wikimedia.org/wiki/File:AXEC97.png
The economist now says to himself, obviously, Gross Domestic Income GDI is equal to consumption expenditures, which follows from the definitions GDI≡Yw+Qm and Qm≡C-Yw. Let us call the right-hand side of the business sector’s account Gross Domestic Product GDP for the general case of the sum of consumption expenditures and investment expenditures. Then we have always, lo and behold, GDI=GDP. This the fundamental macroeconomic accounting identity, after all, accounts must be always balanced.
This whole exercise is futile because profit is NOT the income of capital but the mirror image of dissaving, i.e. the household sector’s increase of debt. Income is a flow and profit is a balance of flows and to lump the two together is sheer accounting madness.*
From the graphics, it is immediately obvious that Keynes’s foundational identity “Income = value of output” is false. This seemingly commonsensical identity leads to I=S which is one of the biggest methodological blunders in all of economics.
Because the profit theory is false since Adam Smith, economics became the failed science that it is today. The scientific incompetence of the representative economist is documented by the fact that he cannot tell the difference between profit and income until this very day. The concept of total income or GNI as sum of wage income and profit is of unsurpassable mathematical idiocy.
Egmont Kakarot-Handtke
* See also ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415
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