Pitfalls In GDP Accounting

People often use the GDP formula to erroneously derive conclusions about financial causation. If the government raises G, according to this argument, GDP must increase obviously, as a rise on the right-hand side of the formula “had to” be balanced by a equivalent increase on the left-hand side. 100 billion upsurge in GDP. In this full case, GDP would remain unaffected, and the private sector would shrink to offset the growth in government perfectly.

The textbook GDP method is constant with both outcomes, so the accounting tautology, by itself, tells us nothing at all about the impact of an increase in government expenses on the overall economy. Here’s a straightforward counterexample: Guess that a small island country is heavily influenced by international trade. 20bn, the economy has crashed by 80 percent.

1 billion; the collapse of exports was almost perfectly counterbalanced by a collapse of imports. Yet it is clear in this example that the blockade is exactly what destroyed the economy and that restoring international trade is the path to recovery. Thus, we’ve yet another example where in fact the GDP method has led even a Nobel laureate on trade to make a simplistic mistake.

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