ECO 285

GDP – Myths, Fables, Distortions & assorted hocus pocus

Dr. Dennis Foster – Spring 2014

Required additional reading:Required additional reading:

• Should we believe the GDP?

• Mises wiki on GDP and problems

• Higgs and Real GDPP

• Rothbard’s Private Product Remaining

• Counting what counts: GDP redefined

• Beyond GDP – Enlarged GDP &FAQs

• Skousen – Gross Domestic Expenditures

GDP measures the value of output?GDP measures the value of output?

• Market value of all final goods and services Market value of all final goods and services produced in an economy in a quarter, or year.produced in an economy in a quarter, or year.

• Market value is not the same as our value.

– Value to the consumer > market price.

– Value to the seller < market price.

• GDP is only measuring $ exchanged in the market between buyers and sellers.

GDP measures market prices?GDP measures market prices?

• No – government valued at cost!!No – government valued at cost!!– Air force orders $7600 coffee makers.– Or, we could buy some insulated bottles.– Possible for value to exceed cost.– Likely that value is below cost.– Higgs: If we’re willing to pay to do without, the

value is, in fact, negative!– Rothbard: Because the expenditures are

based on coercion (taxes), none of itshould be included.

Except for G, GDP measures prices?Except for G, GDP measures prices?

• No – many “expenditures” are imputed.No – many “expenditures” are imputed.– Rent for owner-occupied homes; free checking.– Employer provided health care.– Accounts for 15% of calculated GDP (BEA)

• No – many “expenditures” are derived via No – many “expenditures” are derived via hedonic adjustments.hedonic adjustments.– Computers are better, so price out qualities.– Mises: 35% of GDP is not transaction based.

• FT: other revisions adding 3% to GDP!!FT: other revisions adding 3% to GDP!!– R&D, art, music, et al. now in Investment!

GDP measures economic activity?GDP measures economic activity?

• Well … no.Well … no.• Non-market activity is excluded:– Household production.– The underground economy.– Illegal production.– Leisure

• It only attempts to measure final goods, not all of our economic production (e.g., GDE).

• Real GDP is derived from nominal less inflation.

GDP measures our well-being?GDP measures our well-being?

• No, although it is used as a proxy.No, although it is used as a proxy.• No accounting for wasted spending.• No accounting for environmental damage.– Really, the BP oilspill helped our economy?

• Leisure again.• Measures output, not consumption– How about C + G + (Im-Ex)?

• What of the advantages of advanced tech?

If not GDP, then what?If not GDP, then what?• MEW and ISEW:MEW and ISEW:

Measure of Economic Welfare and Index of Measure of Economic Welfare and Index of Sustainable Economic WelfareSustainable Economic Welfare

• Quality of Development IndexQuality of Development Index• Enlarged GDP – National Welfare IndexEnlarged GDP – National Welfare Index• Private Product RemainingPrivate Product Remaining• Gross Domestic Private ProductionGross Domestic Private Production• GDP2 – GDP5GDP2 – GDP5• Gross Domestic ExpendituresGross Domestic Expenditures

Gross Domestic Expenditures - Skousen

Gross Domestic Private Product - Higgs

Skousen – Gross Domestic Expenditures

Beyond GDP – National Welfare Index

Rothbard – Private Product Remaining

The MEW (Nordhaus/Tobin) and ISEW (Daly/Cobb)

The Quality of Development Index

Can we make GDP unnecessary?Can we make GDP unnecessary?

• Yes, we can!Yes, we can!• ProblemProblem – data collection rife with problems of

what is collected and what it means.• Problem compounded Problem compounded – government policy is

premised on the collection of this data.• Solution:Solution:

1.1. Make simple rules.Make simple rules.

2.2. Enforce property rights.Enforce property rights.

3.3. Eliminate economic policies.Eliminate economic policies.

4.4. Stop collecting “official” data.Stop collecting “official” data.

“The purpose of government is to enable the people of a nation to live in safety and happiness. Government exists for the interests of the governed, not for the governors.”

“The purpose of government is to enable the people of a nation to live in safety and happiness. Government exists for the interests of the governed, not for the governors.”

ECO 285

GDP – Myths, Fables, Distortions & assorted hocus pocus

Dr. Dennis Foster – Spring 2014