Thursday, October 22, 2009

No, That's Not True

Mankiw, again.


From Chapter 2 of Macroeconomics:

"The goal of GDP is to summarize in a single number the dollar value of economic activity in a given period of time."

"to summarize in a single number"


Yeah, that's a handy feature of GDP. One number measures the "size" of the economy.

"the dollar value"


Yeah, this is important. GDP measures the value of output, determined by the prices we were willing to pay for it.

"of economic activity"


No, no, no, no, no.

"Economic activity" is spending. Or... anything we do for money, and anything we do that costs money, and anything we do that has future consequences that somehow relate to money, these are economic activities. But economic activity can only be measured as spending.

Spending is economic activity. All spending. That's not the same as GDP. GDP is a measure of "final" spending only. That's a technical term; I didn't make it up.

Total economic activity is an iceberg. Final spending is what's above the waterline.

3 comments:

The Arthurian said...

The difference between final spending and total spending has implications that are often overlooked.

Final spending is a tally of value created. It's the measurable value of output, behind the scenes in Milton Friedman's famous "money supply relative to output."

Total spending is the unmeasured measure of the actual use of money. I always say it isn't printing money that causes inflation, but the use of money. Total spending is the use of money. Total spending is "demand."

Total spending relative to output, this is the cause of inflation. But we don't even measure total spending.

Gosh golly, we don't even have economists who know the difference between economic activity and GDP.

The Arthurian said...

The goal of GDP is to summarize in a single number the dollar value of value created in a given period of time.

The Arthurian said...

See also my series on Gross Domestic Spending, from the summer of 2014.