Formula for GDP

I confess I have never understood GDP

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I confess I have never understood GDP. I bunked off Economics lectures at Uni, so perhaps that is why.

I get the 'idea', it's just whenever I think about it I envisage lots of double counting. My sales are generally your costs and so on.

Hence, I get confused by what National Income is too.

I saw a formula on a thread yesterday.

Anyone care to expand?

Thanks,

Replies (24)

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By Justin Bryant
17th Jul 2020 16:33

I think it's (without double counting of course) the total value of economic transactions (including black economy), which is a bad economic measure in my view as due to compounding the world's resources will be depleted if it's considered a good thing to continue increasing it and it does not measure the actual real world worth of that output e.g. a society could be the world's biggest economy by generating $10 trn of nail varnishing services, but that is not as good as a £100m economy doing high tech valuable medical services etc.

For all its faults, GDP per capita (in say USD$) is a pretty good measure of how wealthy a country's citizens are (on average of course as there is increasing inequality of wealth).

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RLI
By lionofludesch
17th Jul 2020 16:13

Who cares ?

Whether or not I understand it has no impact on my life.

Boris is unlikely to ask for my views on it.

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Replying to lionofludesch:
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By johnhemming
18th Jul 2020 10:50

lionofludesch wrote:

Who cares ?

Whether or not I understand it has no impact on my life.

Boris is unlikely to ask for my views on it.


The GDP has an effect on most people's lives in the UK because changes in the GDP tend to be reflected in the national finances by an increase of reduction in the deficit/surplus. Its in the 30-40% territory. That obviously has a medium term effect on spending and taxation.
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Replying to johnhemming:
RLI
By lionofludesch
18th Jul 2020 11:13

johnhemming wrote:

lionofludesch wrote:

Who cares ?

Whether or not I understand it has no impact on my life.

Boris is unlikely to ask for my views on it.

The GDP has an effect on most people's lives in the UK because changes in the GDP tend to be reflected in the national finances by an increase of reduction in the deficit/surplus. Its in the 30-40% territory. That obviously has a medium term effect on spending and taxation.

GDP may indeed have an effect on my life.

Whether I understand it does not.

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Replying to lionofludesch:
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By tom123
19th Jul 2020 21:40

I guess I just kind of feel in my line of work I should know, especially as it is presented in the news as if it is patently obvious to everyone.

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Replying to tom123:
RLI
By lionofludesch
19th Jul 2020 21:51

What on earth makes you think that ?

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Red Leader
By Red Leader
17th Jul 2020 18:46

GDP = Consumption Expenditure + Investment Expenditure.
GNP = GDP + Exports - Imports.

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Replying to Red Leader:
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By foxtrot
17th Jul 2020 19:43

Not so - see DJKL below

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Red Leader
By Red Leader
17th Jul 2020 19:49

Ah yes, I forgot G! I did learn it a long time ago now, and funnily enough have never needed it since!

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paddle steamer
By DJKL
17th Jul 2020 19:18

Y=C+I+G+(X-M)

All consumer spending plus all investment made plus all Government expenditure plus net Exports (or in UK case our net Imports, which are in effect minus)

There are various ways one consider National Income Analysis/Accounting, but the expenditure model above is generally the most used, if I still had it I could look up the book I learned most of it from all these years ago, Beckerman, it is a fairly simple read if you are interested.

There are other ways National Income and GDP may be calculated but I have now forgotten most economics I ever studied

https://www.amazon.co.uk/Introduction-National-Analysis-Wilfred-Beckerma...

By ignoring business expenditure you try to as best as possible eliminate the double counting, the rationale being the consumers do not sell to consumers who sell to consumers, so you count their spend only once.

In effect one has a double entry (lets ignore imports/exports)

Cr our economic output we have created Y

Where do we spend it

Consumers spend so Dr C
Government tax us and spend them so Dr G (assumes G spends all it gets, a pretty safe bet)

A few people do not spend everything and save/invest part,so Dr I

https://www.investopedia.com/terms/g/gdp.asp

In effect it is in approach akin to working sales out from an analysis of what has been spent, calculate what we spent, well if we had that to spend we must have made Y; shocking, really, GDP calcs are similar to an incomplete records job.

Do the other institutes not insist on you all studying economics to become an accountant?

In days of old, when only relevant graduates could train with ICAS, you needed to have passed at least first year university level economics to be eligible to start your ICAS training contract.(though as I said, most never stuck with me, remaining bits are a wobbly recollection of supply/demand graphs, equilibriums, pricing models, marginal costs and revenues,IS/LM analysis and some scraps of international economics , that is about all I have left in the grey matter)

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Replying to DJKL:
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By tom123
17th Jul 2020 20:36

I guess I must have crammed for the exam, and then blocked it out.

Thanks for the lesson!

My degree gave maximum exemptions if I recall

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Replying to tom123:
paddle steamer
By DJKL
20th Jul 2020 10:13

Easily done- I can remember absolutely nothing from " Aesthetics & General Philosophy" apart from the names Plato,Locke, Hume, Collingwood and Stolnitz- somehow I passed the exams and wrote the essays during 1980/1981 but the course content is now a total void in my brain, in fact if it was not listed on my degree certificate I might not believe I had taken the course.

The brain is a funny thing, I really did not appreciate how much I had forgotten until my kids got to circa ages 15 to 16 and in trying to help them with schoolwork I started spotting some of the large gaps in my knowledge; subjects at school I had been pretty decent at, in my case Physics and especially Maths( given I was doing a Bsc in engineering straight after school) but forgetting stuff from my 3rd/4th year at school .

It is not uncommon though, my dad at school was pretty fluent in Latin and Ancient Greek (if one can actually be fluent in either), by his 70s whilst he still remembered a lot of his Latin, and could still read Latin pretty fluently (possibly because he still used some of it in his legal career) his Greek had all gone; my French is now down to 20-30 words, not much to show for four years studying it. (My other half, as I speak, is busy downstairs relearning German- school holidays so she is keeping herself busy)

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Replying to DJKL:
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By Caber Feidh
25th Jul 2020 00:05

During my career (and social life) I have often needed to return to topics that I had last studied decades before. I found it was like having a photograph that had gradually gone more and more out of focus with the passage of the years. It was much easier to restore the focus than it would be to recreate a photograph ab initio.

Like DJKL I went straight from secondary school to study engineering at a Scottish University. Unlike him I continued with engineering/physics (in the Scientific Civil Service) and that did ensure I retained the basics, with the more esoteric points being revised (or learned) when required for new projects. For that I retained a rather eclectic library (with even Latin and French dictionaries). DJKL may have forgotten many things, as he said, but I expect he will have retained an engineer's facility with numbers.

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By foxtrot
17th Jul 2020 19:42

A short but erudite read - Diane Coyle "GDP a brief but affectionate history"
ISBN 978 -0-691-16985-9

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RLI
By lionofludesch
17th Jul 2020 20:48

Is the GDP formula not Zzzzzzzzzzzz.........

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By Iamarobot
17th Jul 2020 21:02

GDP includes a lot of guess work and is now meaningless.
Eg imputed rent for owner occupied houses.
They calculate rent on houses owned by people who have paid off their mortgages. No money changes hands but GDP increases.

That is why the government do everything in their power to keep house prices rising

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By SXGuy
18th Jul 2020 07:40

It's about as useful as the consumer price index in my opinion. Horrible method of calculating something.

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By DJKL
20th Jul 2020 09:22

CPI is useful if a lease is linked to it rather than to RPI, RPI ,since 2013 ,being like Pluto; demoted.

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Replying to DJKL:
RLI
By lionofludesch
20th Jul 2020 10:24

DJKL wrote:

CPI is useful if a lease is linked to it rather than to RPI, RPI ,since 2013 ,being like Pluto; demoted.

Pluto ?

Or Plato ?

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Replying to lionofludesch:
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By DJKL
20th Jul 2020 11:20

Pluto- it is apparently no longer a planet, it got demoted like RPI apparently no longer being an official National Statistic (though they still use it)

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Red Leader
By Red Leader
20th Jul 2020 14:54

They were going to cast Pluto out into the outer solar system. Turned out, it was already there.

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Teignmouth
By Paul Scholes
24th Jul 2020 17:08

I read some stuff online about 18 months ago and was shocked not only at how little I knew about GDP, but also how little politicians must know given how often they use it to indicate how well we are all doing.

A recent report I read estimated that perhaps 20% of our economy goes on "Failure Demand" that is putting right something we failed to do or got wrong in the first place. Think of the money we have spent so far following the Grenfell Tower disaster and how much now has to be spent to re-clad all those tower blocks. Then think about how much it would have cost to have clad them in the right material in the first place. Both expenditures are reflected in GDP, had we got it right in the first place GDP would have suffered.

The mantra of economic growth, and its metric GDP, may well have suited the 1930s and following decades but even the architects knew they had little to do with human wellbeing, in fact quite the reverse, and now with the planet's wellbeing also damaged by our obsession with growth, there's a movement towards finding other approaches and measures.

The All Party Parliamentary Group (APPG) on Limits to Growth published this briefing earlier this year, I'm sure it would have raised some eyebrows had it made the news but the powers that be will see it as blasphemous:
https://limits2growth.org.uk/wp-content/uploads/AETW-Policy-Briefing-No-...

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Replying to Paul Scholes:
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By johnhemming
25th Jul 2020 16:56

The difficulty with arguing that GDP is irrelevant is that it was devised as a mechanism for identifying how much tax may be available from a given economic structure.

Whilst I accept that the Club of Rome arguments about limits to growth are reasonable although they may be out in timing by a number of decades, in terms of how the state is financed GDP will continue to be relevant.

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By Caber Feidh
24th Jul 2020 23:33

As I understand GDP, if a man marries his housekeeper he reduces the GDP of the country (because she is no longer paid to clean his house).

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