Context vs Context

The measure of all the stuff we produce in a year is called Gross Domestic Product or GDP. The measure of all the spending it took to produce that stuff is called Gross Domestic Spending or GDS. That's my name for the context variable I've been developing in the last few posts.

GDP includes final spending. GDS includes final and non-final spending.


I want to compare GDP to the spending it takes to generate the GDP. I want to compare GDP to Gross Domestic Spending:

Graph #1: Gross Domestic Product as a Percent of Gross Domestic Spending

It's about a third. GDP is about one third of GDS. For every dollar of GDP, there was about $2 of preliminary or "intermediate" spending. And that seems fairly stable.

There is a bit of a low spot on the graph, though, in the 1970s. Oh... the 1970s. Let's turn the graph other side up:

Graph #2: Gross Domestic Spending as a Percent of Gross Domestic Product

There. The low spot is now a high spot. In the 1970s. Hm.

Well, what can we say about this graph? It's pretty high up. GDS is in the neighborhood of 300% of GDP, three times GDP. The only other thing I remember being that high is total (public and private) debt. Oh, and maybe private debt by itself, that was up there too. But debt was increasing to get up to that level. Gross Domestic Spending is just *at* that level.

You could finesse this, but I don't think GDS being three times GDP is the thing that created the problem. If it was, the problem would have surfaced long ago. On the other hand, Gross Domestic Spending doesn't vary very much. Yeah, there is a small high spot in the 1970s during the Great Inflation. And yeah, there has been a tendency for the ratio to increase since the 1990s. But only a tendency.

Let me look again. Let me get rid of a lot of the empty space below the blue line on the graph, so the line shows more variation. And let's see how that high spot in the 1970s compares to inflation. I'll add two measures of inflation, the CPI and the GDP Deflator to the graph, on the right hand scale:

Graph #3: GDS as a Percent of GDP (blue) and Two Measures of Inflation

Well, look at that. The spending that generates GDP rose and fell, relative to GDP, in a pattern that bears surprising resemblance to the Great Inflation.

I know what you're thinking: Well, sure. Inflation pushed spending up!

Well, okay. But inflation pushed GDP up, too. There is inflation in both top and bottom of the GDS/GDP relation. Inflation cancels itself out of the calculation. The blue line on the graph does not run similar to inflation because inflation pushed spending up. I think the opposite is true. I think the increase in spending relative to GDP is what pushed prices up.