Understanding GDP and its practical meaning

[Hall]

If a country's GDP is 200000,0000000 USD (too many zeros eh?), and
$$
\text{GDP} = \text{ Compensation to employees} + \text{Government Spendings} + \text{ Investments} $$
(Closed Economy, for simplicity, I mean for my simplicity not the country's)

Why do they call it Compensation to employees? Some call it "remuneration". Why not simply "salary"? Digression.

I'm kinda confused as to how they got that 200000,0000000 USD; did they add all the salaries of all the employees in the process? For example, salaries of all employees of, say, Heidelberg Cements (hello German users) be they of Despatch department, Logistic Department, HR department? And similarly adding two that the salaries of all employees of Microsoft Inc.?

And what would investment include? If someone has a piece of real estate somewhere, which is left to fallow (no one is taking it on rent) will that be included as investment? Because people in general parlance speak thus "I've invested in a plot of 2 acres, see what returns will it give?"

Have a nice day (after reading this post)

 

[BWV]

Did you try the wikipedia article? It answers all those questions
https://en.wikipedia.org/wiki/Gross_domestic_product

investment is the creation of capital goods - constructing buildings, factories etc., but investment is not used in the income approach which you mention

US GDP is on the order of $20T

 

[phinds]

Why do they call it Compensation to employees? Some call it "remuneration". Why not simply "salary"? Digression.

Because it is NOT salary in many cases. All kinds of contract workers (think Uber drivers), waiters working for tips, etc.

 

[Hall]

Because it is NOT salary in many cases. All kinds of contract workers (think Uber drivers), waiters working for tips, etc.

Do they add that in GDP?

 

[phinds]

Do they add that in GDP?

Google is your friend

 

[Hall]

Google is your friend
View attachment 314812

I’m a little sad at the reception of this post.

If GDP were to include all the salaries then how do they go on counting about it? There are many people whom I know who doesn’t come in tax slabs and maybe called to be employed in informal sectors, how do they manage to count his salary? I can tell you that no surveyor has ever visited him to ask for his salary, neither he credit his bank account monthly with a fixed amount.

When we read W.B. Yeats poem, let’s say “After a long silence”, we have to imagine by ourselves the situation and things that can be thought of ordinarily, the rest is what the poem is about.

“Do they count it in GDP?”

 

[psikeyhackr]

Maybe we have pseudo-growth!

Increasing GDP is not increasing Wealth it is only increasing Cash Flow. What is Net Domestic Product, NDP. Economists do not talk about that.

Economists treat air conditioners like bananas. Both get added to GDP when purchased, but you know a banana won't last long. The air conditioner should take years to wear out. What happens to the depreciation? What happened to the depreciation of the 200,000,000 cars that were in the US in 1994?

We are listening to economists who can't do algebra.

NDP = GDP - Dcap [Western economic calculation]
NDP = GDP - (Dcap + Dcon) [reality]

Dcap: Depreciation of Capital Goods
Dcon: Depreciation of Durable Consumer Goods

GDP: Grossly Distorted Propaganda

 

[Tom.G]

Economists treat air conditioners like bananas. Both get added to GDP when purchased, but you know a banana won't last long. The air conditioner should take years to wear out. What happens to the depreciation?

It sounds like someone needs to take a basic course in business accounting.

Because it is easier to follow, instead of an Air Conditioner let's use a Lathe as an example of a Capital Expenditure.

Yes, both the Lathe and the banana are added to the GDP, because money changed hands to purchase them; that is the Definition of GDP!

The Banana, being a consumable (lifetime of less than a year, like a grinding wheel or an eraser) is an Expense item.

The Lathe will provide value over its long lifetime, presumably a greater value than it cost. Since it continues to provide value for a time, a company will Depreciate it, distributing its cost as it is being used.

Distributing the Lathe cost over time better reflects the overall financial situation. If the Lathe is shown as an expense when purchased, it would appear that the company profitability was poor... when in reality they were investing in their future.

An analogy would be you need transportation so you buy a car.

Someone looking at your finances might think you are unnecessarilly spending money. Spreading the car purchase over 8 years better reflects the way the car is used. (Many people do this cost spreading by borrowing the money and paying it back over time.) If the company buying the Lathe has the cash available, they are essentially loaning themselves the full purchase price and paying themselves back over the depreciation period at Zero interest, a much better deal.

Try this site for more words on the subject:
https://www.investopedia.com/ask/an...les-main-types-capital-expenditures-capex.asp

(above, and many more, found with:
https://www.google.com/search?=&q=capital+expenditure+vs+depreciation)

Cheers,
Tom

 

[psikeyhackr]

It sounds like someone needs to take a basic course in business accounting.

Because it is easier to follow, instead of an Air Conditioner let's use a Lathe as an example of a Capital Expenditure.

Like the Laws of Physics can tell the difference between a capital good and a consumer good. The Depreciation Allowance is what can be filed with the IRS. If a business fails to file for the depreciation allowance does that mean its machines don't depreciate?

We are just stuck with economists who are either morons or liars. It is curious how often we hear about GDP and so rarely about NDP.

We are supposed to think about economics the way we are told but that does not stop the value of consumer goods from decreasing. And then we can wonder what planned obsolescence does for GDP. Economists don't discuss that much either.

 

[psikeyhackr]

http://politicalforum.com/index.php...anda-since-wwii.603085/page-2#post-1073690886

 

[BWV]

Maybe we have pseudo-growth!

Increasing GDP is not increasing Wealth it is only increasing Cash Flow. What is Net Domestic Product, NDP. Economists do not talk about that.

Economists treat air conditioners like bananas. Both get added to GDP when purchased, but you know a banana won't last long. The air conditioner should take years to wear out. What happens to the depreciation? What happened to the depreciation of the 200,000,000 cars that were in the US in 1994?

We are listening to economists who can't do algebra.

NDP = GDP - Dcap [Western economic calculation]
NDP = GDP - (Dcap + Dcon) [reality]

Dcap: Depreciation of Capital Goods
Dcon: Depreciation of Durable Consumer Goods

GDP: Grossly Distorted Propaganda

GDP is analogous to revenue, not profit, nor is it a measure of asset value. Depreciation is not relevant as there are no capitalized items included in the calculation

 

[Hornbein]

This was not your question, but I can tell you that GDP doesn't have all that much to do with quality of life. Money spent on bad or undesirable thing and services adds just as much to GDP as good things. I live in a country with low GDP but high quality of life so I experience this every day.

 

[russ_watters]

This was not your question, but I can tell you that GDP doesn't have all that much to do with quality of life. Money spent on bad or undesirable thing and services adds just as much to GDP as good things. I live in a country with low GDP but high quality of life so I experience this every day.

To be clear, it's GDP per capita, not GDP that is a decent indicator of well-being. Also, it's very odd to call something somebody bought "undesirable". Surely the fact of buying it and for how much is the definition and a measure of "desirable"?

 

[Hornbein]

To be clear, it's GDP per capita, not GDP that is a decent indicator of well-being. Also, it's very odd to call something somebody bought "undesirable". Surely the fact of buying it and for how much is the definition and a measure of "desirable"?

That's a perfectly reasonable view but there are other ways to look at it. A criminal or nut may find a weapon highly desirable but society in general would be degraded by such a purchase.

 

[Vanadium 50]

I don't think anyone has claimed that GDP is the Gross Happiness Product.

 

[jbriggs444]

I don't think anyone has claimed that GDP is the Gross Happiness Product.

Drat. I was about to try to make a point about the happiness value of money.