Should savings be counted in GDP?

[talk2glenn]

It's about whether GDP should reflect efficiency-increases that lead to savings.

It does, once those gains translate into additional goods being sold on the market. Dickfore and I have explained this to you many times. Efficiency gains release resources towards the production of new goods that could not be produced before, given a fixed capital base.

GDP is, however, a measure of production, by definition. A change in production efficiency, in and of itself, has no effect on the amount of production in an economy. Nothing else that you've offered in the thread is relevant.

You're not trying to measure GDP; you're trying to measure the production possibilities frontier (the range of goods that could be produced in an economy, given its resource base and technology). GDP measures actual production.

 

[brainstorm]

You're not trying to measure GDP; you're trying to measure the production possibilities frontier (the range of goods that could be produced in an economy, given its resource base and technology). GDP measures actual production.

You have a point, but I'm still wondering about the effects of restructuring on lost wages and thus consumer spending. If GDP goes down as a result of innovations and restructuring, it makes it seem as if productivity decreased when, in fact, all that decreased was purchasing power and the cause of that was layoffs. How do you distinguish between recession caused by decreasing productivity/efficiency and that caused by increasing productivity/efficiency? In fact, it may even be the case that decreasing productivity/efficiency results in increased GDP if more spending and labor hours are used to satisfy a given amount of demand. In that case, doesn't GDP misrepresent what is actually stagnation or recession as growth, just because more money changed hands to maintain productivity levels?

In other words, doesn't GDP only represent money exchanges while failing to take account of actual material productivity and consumer fulfillment? GDP goes up when people buy more and are satisfied less; and it goes down when people buy less because they don't need as much to achieve satisfaction.

 

[WhoWee]

The total GDP is redistributed as:

<br /> Y = C + I + G + NX<br />

where

C - private consumption

I - gross investment

G - government (public) spending

NX = Imp - Ex - net exports

The point is that on the market of loanable funds, there are people (or institutions) who want to lend money from their savings and people who want to borrow money for the investments they are about to undertake. This market brings the supply and demand of loanable funds in equilibrium:

<br /> S = I<br />

and the equilibrium price on the market is the interest rate for borrowing (or saving), which should be equal apart from a small commission charged by the financial institutions (banks) for the service they provide. Thus, saving is already included in GDP through gross investment and should not be considered once more.

Banking regulations (capital/reserve requirements) will alter the efficiency of savings and lending.

 

[Dickfore]

Do, you mean the equality

<br /> S = I<br />

is no longer valid?

 

[WhoWee]

Do, you mean the equality

<br /> S = I<br />

is no longer valid?

I'm suggesting that Government regulation and interference often de-rails sound economic principles.

http://www.vcee.org/misc/userfiles/file/Six%20Core%20Economic%20Principles.pdf
"People Respond to Incentives in Predictable Ways: Incentives are actions,
awards, or rewards that determine the choices people make. Incentives can be
positive or negative. When incentives change, people change their behaviors in
predictable ways."


On a very basic level - what happens when the Government pushes interest rates to near zero - is saving stimulated? When Government requires banks to increase their reserves - is lending stimulated? When taxes are raised - is investment stimulated? When Government provides on-going subsidies for people with low income - are people stimulated to increase their income?

Government regulation changes the rules of the free market and can skewer economic models.

 

[brainstorm]

Do, you mean the equality

<br /> S = I<br />

is no longer valid?

I think saving that equation refers specifically to currency used to purchase deposits, which are subsequently lent out to borrowers. In that sense, savings is directly converted into stimulus spending.

Structural modifications that create savings are different, though, in that expenditures are reduced instead of stimulated by saving/lending (investment). E.g. say a factory that produces electrical wire finds a copper-vein in back of the factory. If it stops buying copper from its supplier, it saves money on inputs. Yet, the savings might not be re-invested in anything except bonuses or lowering the price of its products. Still, those bonuses or consumer-savings would be a form of direct investment in the people reaping the benefit.

Take another example in which a company lays off workers and uses the savings to increase share-dividends or the wages of other employees. In that case, that money gets "invested" by increasing the purchasing power of the people receiving it. They might waste the money on drugs, sex, and rock&roll but aren't those forms of fiscal stimulus? What if they save it bank deposits? Don't those deposits get lent out as mortgages, etc.? The only way the savings would not trickle-down, I think, is if it is getting put into enterprises that lure people away from efficient uses of resources, which is actually what most of the economy does, imo. Still, inefficiency drives GDP by inducing more spending per unit utility, so irrationality can increase together with profit, though this can still ultimately have recession-intensifying effects.

 

[WhoWee]

Do, you mean the equality

<br /> S = I<br />

is no longer valid?

I'm not trying to over turn 74 years of economics...

http://finance.wharton.upenn.edu/~bodnarg/courses/nbae/readings/Bodnar2.pdf

...just indicating Government has the power to maipulate.