Tuesday, February 01, 2011

The Fallacy of GDP

The GDP is more and more striking me as a meaningless, or even false, method for measuring the economic health of this nation. Especially when I keep hearing that “consumer spending” is such a major contributor to it.

Adam Hersh, an economist at the Center for American Progress, has a piece there in which he defines GDP as an index which, “measures the sum of all goods and services produced in the United States minus imports.”
He goes on in the piece to discuss the GDP and its current rate of growth and says that, “Consumption from households accounted for the next largest share: 3 percentage points.”

? Consumption = Production ?

How does “consumption by households” increase the “gross national production” exactly? The question becomes especially important when the consumtion probably consists to a significant degree of imported goods and raises the national production of, perhaps, China. But regardless of the source of the goods, in what language does “household consumption” constitute national production of any sort?

I’m guessing that the thinking here is that the sale of a television set involves a “service” in that the television is transported to the point of sale and is displayed to allow the consumer to buy it, that the sales clerk provides a service in assisting the consumer decide which television to buy and another service in taking the consumer’s money. I’m just having trouble coming up with a suitable way of describing my contempt at that being included in the “Gross Domestic Product.”

Notice that “minus imports” in the calculation of GDP. Do you see the fallacy in that little piece of sophistry? Right. That imported television is deducted in the “minus imports” part, as Hersh points out in, "Growth was led by an improved trade balance, which accounted for 3.4 percentage points." Then it is added back into the GDP in the “consumer spending” part, which, "accounted for the next largest share: 3 percentage points.” That’s why the GDP grew even though American jobs did not.

And now, as Paul Harvey said, you know the rest of the story.


  1. is that like the budget is not a problem if SS and medicare and off budget things like wars are not included? or are included for balanceing purposes, but then excluded for taxes? wait.... I'm confused, and getting a headache. I guess it is BS after all...

  2. I think you are right because we need to improve our economic health right now!