GROSS DOMESTIC PRODUCT Counting Government Activity In GDP Gross Domestic Product (GDP) supposedly measures the amount of economic activity happening in the economy. There are several ways to measure it but they end up with the same result, whether by measuring sales or workers salaries or whatever. In any case, the common definition of gross domestic product includes all activity by the government. Much of government is similar to the idea of hiring everybody to dig holes and fill them back up. The GDP would be very healthy except no products are produced. Isnt GDP supposed to measure economic activity, presumably activity that contributes to the peoples well-being and happiness? Presumably those hole diggers are getting paid but by whom? The government and where does it get the money? Prints it? Taxes the diggers? If the latter, why would they dig if they had to send all their earnings back to the government plus there would be no food or clothes to buy. If the government prints the money, it has no value. It is fake money, like Monopoly. Of course this is an extreme and ridiculous example, but it must be true for any part of the economy that doesnt produce things that people need and want. That defines much of government today. Some of government is designed to keep the peace, both internally and from outside forces. At least some part of that activity is needed for the economy to supply products. If the government doesnt supply it, it is paid for by the manufacturer. Most businesses dont entirely depend (or even mostly) on government security. They spend money on alarms, on security cameras, on watchmen, and so forth. So keeping the peace is a necessary part of building products; thus the activity should be part of GDP. Businesses decide on how much security they need as a tradeoff in costs of doing business. If shoplifting gets to be too big of a problem, they hire more watchmen. Government doesnt decide on these issues economically, usually only politically. So there are things government does to aid in producing products but most of those things could be done more effectively and inexpensively by private means. However, most of what government does has nothing to do with creating a product. If it does aid, it does it inefficiently. So why are we counting government efforts in GDP? We shouldnt be. Salerno writes a story about GDP where a little island is producing 1000 apples per year. You would think the GDP is 1000 apples or the money equivalent. But if 200 of those apples are forcibly taken by the government in taxes, the GDP is 1200 apples, no matter what the government does with those apples. Even worse, if the government borrows apples from another island, that is also included in GDP. As a result, GDP has little meaning. GDP can increase because of increased government spending with no more production of things that people need or want. We all may think our economy is perking along but it might just be more government, a certain drag on the economy. newsbalance/how-reducing-gdp-increases-economic-growth-2015-01-02.article
Posted on: Fri, 02 Jan 2015 18:17:05 +0000
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