GDP Primer

Mar 5, 2024 | Finconomics 101, No Bull Economics

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Before we use GDP as a measure of economic growth, we should take a moment to discuss the merits of its components…

Comments

  • The important point is that GDP is primarily a measure of consumption, as opposed to production – please see the formula below:

GDP = C + I + G + (X − M)

C = personal consumption expenditures

I = gross private domestic investment

G = government consumption expenditures & gross investment

X = exports

M = imports

  • As consumption can be financed with debt, the reported GDP can be vastly overstated in terms of its true organic growth (i.e. consumption growth driven exclusively by an actual increase in disposable personal income). Imagine what the government would be reporting if its GDP number was adjusted for changes in consumer debt? 
  • Also, while an increase in government consumption & “investment” may drive GDP growth as it is currently calculated, government spending destroys economic value by inefficiently crowding out private sector spending & investment.
  • A better measure of economic growth would be based upon an analysis of: real disposable personal income (adjusted for inflation); real business investment; exports – imports; less government consumption expenditures & gross investment.

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