The first new economic aggregate since the introduction of GDP

One of the great mysteries of economics as it is now is to say that consumption comprises 60-70% of the economy and that therefore we must stimulate consumption to stimulate economic growth. But the reality is that so far as the value added of different activities go, consumption contributes either around 6-7%, which is the soak up of resources in the retail sector, or 100% which when all is said and done is the ultimate contibution consumer demand makes since final consumption is the point of all economic activity. As with so much in economics today, the problem starts from the Keynesian mindset that pervades macro.

The great Austrian economist, Mark Skousen, has been hassling the American government for many years to fix up the way they gather and report statistics and of all things, they have now begun to supplement their usual national accounting stats with a measure that actually burrows into the data in ways that show the underlying supply-side contribution of different sectors of the economy.

Forbes in its latest issue carries an article by Skousen, Beyond GDP: Get Ready For A New Way To Measure The Economy, which explains what is being done and how it will make a difference.

Starting in spring 2014, the Bureau of Economic Analysis will release a breakthrough new economic statistic on a quarterly basis. It’s called Gross Output, a measure of total sales volume at all stages of production. GO is almost twice the size of GDP, the standard yardstick for measuring final goods and services produced in a year.

This is the first new economic aggregate since Gross Domestic Product (GDP) was introduced over fifty years ago.

The disastrous Keynesian wreckage that has been devastating economies across the world has to a large extent been driven by the Y=C+I+G+X-M formula which everyone learns in first year and then, because it is so ridiculously simple, is never forgotten again. It helps establish in the minds of economists, governments and the public that economies are driven from the demand side when it is the one place that an economy receives no momentum at all. As Mark has put it:

By focusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process. It’s as though the manufacturers and shippers and designers aren’t fully acknowledged in their contribution to overall growth or decline.

There are no perfect measures at the aggregate level and the double counting that affects such an aggregate is noted by Skousen. But anything that can finally place the focus on the production side of the economy and end the preoccupation with demand is a massive step forward.

I hope the ABS is taking note.

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5 Responses to The first new economic aggregate since the introduction of GDP

  1. Trent

    Just what we need, another aggregate :/

  2. So GDE/GDP is in effect a measure of the depth of the economy, showing the number of levels of production hanging off the back end of every retail transaction.

  3. .

    Is gross output different to gross domestic revenue/GDR?

  4. I am no fan of the GDP measure (How can you trust something that seems to deny the broken window fallacy?), but doesn’t the selling cost include the factor costs, more or less? Yes, profitable means more and unprofitable means less, but close. That then causes it to be no surprise that GO is about twice GDP, as double counting leads to exactly that. I’m ready to be educated on this, but GO just seems like another way to come to a meaningless number that is twice as big.

  5. Andrew

    My first thought is that at the micro level if we think of GDP as profit (moreso value-added), then the closest things to gross output is revenue. Far from GDP understating activity and benefits, gross output would severely overstate it, as you say through double counting, etc. So perhaps a useful ancillary measure in that it shows how much activity or running around you’re doing, but not necessarily very close to the final macro goal.

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