GDP knowledge, Continued

The next example for the GDP formula:

         My mother sells her house in New Orleans to a Swedish woman for $200k

Here we go again with English grammar: the subject is "My mother".  Did what? "sell her house in New Orleans". The sale of a house causes something to the GDP. We can assume that the mother is American, making some money on the sale of the house. That would increase GDP, by $200k. But to whom does she sell? "to a Swedish woman".  That falls under "NX", so is minus $200k. In other words, this transaction's net effect is zero on the GDP.

                    I buy a Japanese made lawnmower for $200

"I buy", means it adds $200 to the GDP, namely to the "C" which stands for consumption.  "Japanese made", means it will be an "NX" function, so will be a - $200. The net result will be zero addition to GDP.

                      I buy a new home in California for $500k

"I buy" again means an increase to the GDP. This time it is an investment, so comes under "I". Remember only a brand new house does not come under consumption, but is an investment. This will add $500k to the GDP. If you sell the house 10,12,15 years later it is not an investment anymore. It will then come under consumption.

                   American Airlines buys a new Airbus jet (made in Europe) for $100m

"American Airlines buys" adds $100m to the GDP. A "new jet", qualifies it as an investment, so falls under "I". But it is "made in Europe", so also falls under "NX" as a negative $200m. The net effect is zero addition to GDP.

So that gives us three examples which do not add to the GDP. No wonder people "protest" and want everyone to "buy American"!
However, that short-sighted. In our first example, the Swedish woman has to either come and live there or rent it out. This means people will be added to New Orleans who need to eat, pay for water, electricity, groceries and much more which will add to the GDP in the long run.

That Japanese lawnmower needs gas, oil and maintenance which will be American, so it will add to the GDP in the long run.

The Airbus jet will include national flights somewhere along the line. Maintenance, labor, fuel, parts, etc., will not all be foreign either so will add to American GDP. In the long run it will keep American airplane factories on their toes to maintain competition. Many foreign airlines buy American made jets too.

     There you have it! look back on these examples put forth by the Khan Academy to get a better picture about GDP.

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GDP Knowledge



It is not easy to understand GDP when we read about it in the newspaper or an article online. If you are like me, it makes you suspicious. "What does the writer want?" or: "Who paid this economist to write this article?" or: "Which politician is behind this?"

Let's look at the answers to the questions I posed to you on last week's blog. Remember the equation?

Under that, were six statements and you were to identify under which part of the equation they fit, if any. Having studied that for some time now, I get the picture and I want for you, the reader to understand it as well. You read stories like, "We should buy all-American products to improve our economic situation and get every able American to work again."

The first statement to identify was: Khan Academy employs a new software engineer and pays him $100k.  How does that affect the GDP? Let me remind you: GDP stands for Gross Domestic Product. This makes me think a bit of dissecting a sentence in English class. We are looking for the subject, which is Khan Academy. What is Khan Academy? It is an American (domestic!) non-profit organization. What is Khan Academy trying to do? It is hiring, in the USA, in order to provide a better service to its clients. That falls under the "I" of the equation, because by definition, the I means investment, referring to labor, buildings, tools, equipment, etc. needed to produce a new "widget", or to increase production. If I goes up, GDP increases. So, this is a positive answer to: "buy all-American" from an economic standpoint.

The second statement: Accenture earns $10m by building a new IT center for California. Again, let's break down this sentence: Accenture is the subject, an American company. "Earns", the verb indicates income for Accenture, which probably adds somehow to the GDP.  California is an important word: it is a state, so building something for the state indicates Government. Bingo, it is built for the government, so comes as an increase under "G"!  We see articles justifying government to "spend more money" to help "create jobs", especially in economical down-turns. This may be good or not so good. After the big depression in the early 1930's, it was a good move. Roads and dams were built and America came out of the depression. How about the 2008-9 recession? Not so sure it did much. Jobs are created slowly, but mostly in the private sector, and it is fairly slow; even now (in 2015) we are still trying to come out of it. The government is trying to "help" by: reducing interest rates, but that also cuts into retirement account rates for people who can barely make ends meet. On top of that, salaries have not been growing, while housing prices are steadily increasing again, so a larger % of income has to be allocated to housing.

Let's look what Dr. Housingbubble has to say in his latest blog:

While Los Angeles County is a majority renting county with over 50 percent of households renting, San Francisco is a hardcore renting city with only 36 percent of households owning.  We should also take note that in California, housing booms and busts in regular intervals.  We are already seeing price appreciation slow down in San Francisco:

There is an odd sort of trend that unfolds here and it makes sense.  Hot money from the stock market flows into these companies that seem to rise and fall with the whims of the economy.  But for the regular grunts at these places, housing values seem so out of reach.

The result is, that there is less for the average consumer to spend, so companies have very little incentive to increase production, hire more people, etc. More about that in the next blog.

Question:  What do you think should happen?

Check your knowledge about GDP



We try to measure well-being in terms of economics and encounter some conflicting social issues not measured by GDP. Clifford Cobb, Ted Halstead and Jonathan Rowe point out that teenagers spend 5-10 minutes a day talking to dad and watch television three hours a day. Talking to their parents adds nothing to the GDP, but watching MTV turns them into ardent GDP enhancing consumers. They write:

Growth can be social decline by another name. Divorce, for example, adds a small fortune in lawyers’ bills, the need for second households, transportation and counseling for kids, and so on. Divorce lawyers alone take in probably several billion dollars a year, and possibly a good deal more. Divorce also provides a major boost for the real-estate industry. “Unfortunately, divorce is a big part of our business. It means one [home] to sell and sometimes two to buy,” a realtor in suburban Chicago told the Chicago Tribune.

By the curious standard of the GDP, “the nation’s economic hero” is a terminal cancer patient who is going through a costly divorce. The happiest event is an earthquake or a hurricane. The most desirable habitat is a multibillion-dollar Superfund site. All these add to the GDP, because they cause money to change hands. It is as if a business keeps a balance sheet by merely adding up all “transactions,” without distinguishing between income and expenses, or between assets and liabilities.
So far I put GDP in perspective. Khan Academy to the rescue: let's go to the economic side of GDP (the "Y") to understand its components. 

Starting with the “I,” it needs explaining what that means. The “I” stands for what firms invest to get their product (widgets) out: labor to make the widgets, as well as machinery, a building, supplies to construct it are all factors. The “C” stands for what households buy. The "G" stands for government expenses, and "NX" is the difference between imports and exports. NX can be a positive or negative.

Following are some examples for you to identify which part / parts of the equation they belong in.

Give your answers and I will discuss those next week




When I was looking for a logo, I wanted it to include a bell. For other than Dutch speakers, the connection may be difficult to make. In English a bell rings or clangs. In Dutch it rinkels. Our family coat-of-arms includes a bell.  When I asked for opinions on Facebook and Twitter to make a choice out of 6-8 logos, the first four respondents were Dutch, and I don’t believe by coincidence! They immediately saw the connection. :)

The title of this blog is translated from a Dutch saying, which means that someone has heard of something, but does not know the specifics.

“Klepel” is clapper in English. The translation above is by definition. A literal translation would be meaningless. It was the same for me when we lived in the Czech Republic. A joke would be told, and I would understand some of the sentence, but not the meaning. I would ask:“what is so funny?” The standard answer was: “you wouldn’t understand it anyway.”

That is how I feel about this blog, sometimes. I recognize a lot when reviewing macro economics, but I cannot (yet) answer the question:

National debt is no big deal, or is it?

Deficit and the debt ceiling



A country can have a deficit in a given year, if it spends more than its income, say from taxes and other sources. The difference will be a debt it owes.

The debt of a country is the accumulation over many years. Say the country spends $10, but has only $6 in income, to keep it simple. At the end of the year the $4 will be added to the debt it has accumulated over past years.

Above is a diagram from the Khan Academy showing the example of deficit vs. debt. It is pretty close to the deficit of the USA, where the deficit has been around 40% for a number of years. The amount gets added to the debt as shown in the graph. 

Congress sets a debt ceiling, which gets adjusted several times a year. It is a political game in which the minority party threatens not to raise the ceiling, unless there is also a debt reduction put in place. Jack Lew, the current US Treasury Secretary can manipulate some funds around to cover part of the debt, but at a certain point will have to tell Congress the treasury will run out of money by, say July 14. Then Congress goes to work and debate the next debt ceiling level.

One thing I never knew is that Denmark is the only democratic nation other than the United States that has a debt ceiling and borrowing system separate from its spending policies. What does that mean?

By this process, spending bills like budgets are passed and then a separate battle is fought over whether the debt ceiling should be raised to accommodate borrowing to allow such spending. There is nothing to require a correlation between the two. However, in nations like Canada, Sweden, the United Kingdom, and New Zealand, spending is directly tied to the national debt limit. The government in Canada is allowed to borrow only as much money as is approved to be spent in the yearly budget. In the UK and New Zealand, the Treasury departments can borrow only as much as is approved by parliament. These countries tie their debt limits to their spending numbers.   (Radio Free Europe article, August 26, 2014)

Where else is a borrowing system separated from spending? That is not something I learned in kindergarten.

If the debt ceiling is not raised, the government goes into default. It will have to reduce expenses in programs such as social security, Medicare, Defense, etc. The result is that the government is no longer trusted. It is risky and as a result the interest rate will increase, which makes the default situation only worse.