The True Gross Domestic Product

posted by Nima

December 2, 2008 · Posted in General Economics 

The Gross Domestic Product (GDP) is a figure that, in itself, tells us virtually nothing about the true state of the economy. The purpose GDP is to estimate the output of factors of production inside the territory of a country.

The way this is calculated is by adding up all money prices spent on goods by domestic individuals, plus the price of goods exported to individuals abroad, minus the price of goods imported, so as to exclude products that were not produced inside the country.

The GDP adds up as follows:

GDP =
Private Consumption (sum of prices paid for consumer goods by domestic non-government Individuals)
+ Private Investment (sum of prices paid for factors of production by domestic non-government Individuals)
+ Government Expenses (sum of prices paid for consumer goods and factors of production by government individuals)
+Exports (sum of prices paid for consumer goods and factors of production sold abroad)
-Imports (sum of prices paid for consumer goods and factors of production for goods produced abroad)

The main problems with this figure are the following:
- All prices are added as US dollar prices. Thus the effect of inflation is not taken into account satisfactorily. Even in the so called Real GDP, the deflator used is based upon the insufficient consumer price index.
- Government expenses are added to the total product at cost. Bureaucratic waste is not accounted for.

Thus we shall employ the following makeshifts in order to better approximate the country’s true productive capacity:

- Instead of US dollar prices we shall add up the price of goods sold in fine ounces of gold, a true and stable money.
- Government expenses shall be discounted significantly. All expenditures by the federal government shall be included at 30% of reported prices and local and state governments, due to better oversight, shall be included at 50% of reported prices.

Below please find the historical development of the True Gross Domestic Product in the United States from 1947 through 2008:

Click in image to enlarge.

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2 Responses to “The True Gross Domestic Product”

  1. Koichi on February 26th, 2010 2:24 pm

    Quick question about your True GDP measurement: \Government expenses are added to the total product at cost. Bureaucratic waste is not accounted for….Government expenses shall be discounted significantly. All expenditures by the federal government shall be included at 30% of reported prices and local and state governments, due to better oversight, shall be included at 50% of reported prices.\ I don’t quite get the adjustments you are suggesting…what do you mean by \bureaucratic waste\? Why 30% and 50%? If you could shed more light on this, I would appreciate it!

  2. Nima on February 26th, 2010 2:58 pm

    Look, the GDP is already a pretty arbitrary and fuzzy measure. All I am trying to do is get it a little closer to reality. Market prices are paid by consumers voluntarily. So it is a little more realistic to assume that the goods were worth to them the price they paid. But when a thug comes to your house and takes 30% of your annual income from you or kidnap you and lock you up otherwise, then it is safe to assume that the “service” he will be providing to you with that money is not really worth it to you. The less control you have over what they do with your money, the less likely it is the money will actually work for you at all. So I am giving local authorities a little more of the benefit of the doubt in the value they actually provide to you than federal ones. Because you have no control whatsoever over what the FEDs do with your money. But you may have a little bit more say in what NYC does with it.

    The 30% and 50% reflect that assumption. They are, however, arbitrary figures, no doubt. I don’t have an empirical way of finding the ideal numbers for this, nor do I think it is necessary, given the flaws inherent to the GDP itself. If you have any suggestions on this, I would gladly incorporate that in my analysis.

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