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?