In Q3 of 2009, true gross domestic product has fallen to 12.14 billion gold ounces. This is a decline of 21.8 percent from Q3 2008.
True Consumption as Percentage of GDP
To follow up on Consumer Goods vs. Factors of Production:
In that post I illustrated consumer goods production vs. investment goods production in the US. I noticed that the composition of the GDP at bea.gov has one flaw: It includes so called “Residential Investment” under Investment. But what mostly falls under this category are purchases of new homes.
A home clearly does not qualify as a factor of production and it is thus a mistake to include the production of it under investment goods (factors of production). It makes a lot more sense to include it under consumption.
The percentage of consumption vs. GDP throughout history would then look like this:
The likely bottom for a serious recovery would here be somewhere between 86% and 90%.
The True Gross Domestic Product
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.
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.