Friday, July 4, 2014

"Gross Domestic Spending" is not "Gross Output"

So I was rummaging around the internet, looking for other people's use of the term "gross domestic spending". Among the first few hits I found something that confused me. I couldn't tell if it was relevant to my topic. I had to take another look.

The puzzling piece was in the Production approach section of the Gross domestic product article at Wikipedia. The confusion arose because they explained one thing that I didn't know about in terms of two other things I didn't know about:

Gross value added = gross value of output – value of intermediate consumption.

Reading it over (more than once) helped. Realizing that "gross value of output" was the same as "gross output" helped. Reading someone else's version of it helped, too:
Gross output is an economic concept used in national accounts such as the United Nations System of National Accounts (UNSNA) and the US National Income and Product Accounts (NIPA). It is equal to the value of net output or GDP (also known as gross value added) plus intermediate consumption.

I'd swear I read that the NIPAs don't use the "gross output" concept, but I can't find the reference now. No matter. "Net output" equals "gross value added" equals GDP, they say. That helps me tie things together.

So Gross Domestic Product is net output. Reminds me of Jim's question: So what do you call gross spending? Do you call it Gross Gross Domestic Product?

The Wikipedia page links to their Intermediate consumption page, which also helped:

Conceptually, the aggregate "intermediate consumption" is equal to the amount of the difference between Gross Output (roughly, the total sales value) and Net output (gross value added or GDP). In the US economy, total intermediate consumption represents about 45% of Gross Output.

Okay, I was at last mentally prepared to deal with the idea of "Gross gross domestic product" -- of a quantity bigger, more general, more "gross" than GDP. GDP is "net" output, after some other output is used up producing it. The part that gets used up is "intermediate consumption". The part that remains is GDP. And the total of the two is "gross output".

Forty-five percent, they say: "Total intermediate consumption represents about 45% of Gross Output." How can I make use of that fact?

Gross Output equals 100% of Gross Output. Intermediate Consumption is 45%. And GDP is what's left. So GDP is about 55% of Gross Output. Pretty remarkable, don't you think? Gross Domestic Product is barely half of Gross Output.

How does this compare with Gross Domestic Spending? Well, GDS is about three times GDP. Gross Output is about two times GDP. So Gross Domestic Spending is bigger. Let me see...

Gross Output is 100% of Gross Output. GDP is about half of that, or 55%. And Gross Domestic Spending (as we saw the other day) is a little less than three times GDP. Three times 55 is 165. A little less, so say 150. So Gross Domestic Spending is about 150% of Gross Output.

So if you were wondering what businesses spend all that money on, something like two times GDP, well, "intermediate consumption" explains half of it.

But don't forget: The part of GDS that is all tax deductions is twice the size of GDP.

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