The True Gross Domestic Product
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:
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.
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