Wednesday, December 18, 2019

How the Definition of GDP can tell a big Lie

Paul Krugman wrote an article under the title: “How Trump Lost His Trade War,” and the subtitle: “On speaking loudly and carrying a small stick.” It was published on December 16, 2019 in The New York Times.

Somewhere in the middle of the article, speaking of China, Krugman says the following: “America was never going to succeed in bullying a nation whose economy is by some measures, larger than ours.” What is he talking about when it is known that America's GDP is 3 or 4 times the size of China's?

Yes, that's what's known. When assessed in accordance with the current definition of GDP, and when measured in dollar terms, America's GDP comes up to something like 21 trillion dollars whereas that of China comes up to a value that's fixed at between 4 or 6 trillion dollars depending on who's doing the counting, and what the Dollar/Yuan exchange rate is on the day of counting. But is this accurate?

To get a better idea of what's going on, we imagine the following scenario about three acquaintances that meet in the opulent home of one of them, where each tells the story of what he did on that day.

Character # 1: I'm just an upper-middle-class Joe as you know. So, I went to work at eight o'clock in the morning where I worked till noon. I took an hour off for lunch, which I spent at the local restaurant. I returned to work where I did four more hours of chores, and went home at five o'clock in the afternoon. All in all, my moves on this day, including the restaurant meal I had and the tip I left for the waitress, contributed about 1,000 dollars-worth of activities to the GDP of the nation.

Character # 2: I own a small business as you know. So, I went to my office early in the morning and prepared a work schedule for the day ahead, to be completed by the dozen employees that make-up my team. I explained the schedule to my shop supervisor, and went with him through the shop to make sure he was giving the right instructions to each employee. I inspected some of the products they started making, and they were to specification. This took half of my day. After that, I went to the shopping mall where I dined, wined and shopped, and then went home. All in all, my activities on this day, aside from those of my employees, contributed about 4,000 dollars to the GDP of the nation.

Character # 3: I own this house as you know, which I inherited together with a substantial sum of money that's invested in various instruments. I don't have to do more than keep an eye on my investment –– I count my money, if you prefer –– and spend the interest that it yields. So, I woke up late this morning, as I always do, given that I was out till the wee hours of the morning having a good time. I had a fancy brunch in the Cleopatra Room of the nearby Caesar Hotel, then went to participate in the discussion that the local art gallery is having with regard to the possible return of an artwork, claimed to have been stolen. After that, I went across town where I had an early dinner in one of those T&A outfits where I tipped a waitress that was endowed with a magnificent pair, with a pair of hundred-dollar bills. Then, I came here to meet you guys. All in all, my activities on this day, including my tip to the waitress, added 8,000 dollars to the GDP of the nation.

As you can see, my dear reader, the first character produced goods and/or services for eight solid hours during that day. This is actual wealth that benefits the nation. As to the second character, he acted as a producer of wealth for only half the day. Even though he acted as a consumer, during the other half of the day, his activities were counted as wealth-producing, and were falsely added to the GDP of the nation. As to the third character, he acted like a consumer all day long, producing no wealth at all. And yet, every move he made as a consumer, including his fascination with the breast of the waitress, were counted as wealth that added a big (fictitious) amount to the GDP of the nation.

In the way that the GDP is counted in America, the activities of these three men came up to 13,000 dollars for the day. In China, they would only count the 1,000 dollars of the first character, and half of the second character's 4,000 dollars for a total of 3,000 dollars –– as opposed to America’s 13,000. And this is why you see a large discrepancy in the GDP of the two nations even if they enjoy roughly the same standard of living, providing the same level of health care for their citizens, the same level of education for their children, and the same level of services for everyone.

In addition to that, if you apply to America the sort of accounting they do in China, you'll also have to count as expense-incurring activities –– as opposed to productive activities –– the money that is spent on the military, the national guard, the coast guard, the police, the legal and prison systems, as well as the health care, the education and the other services which are spent on the population without producing real wealth. If you do this, you'll find that when it comes to producing real wealth and not fluff, China is ahead of the United States. And that's what Paul Krugman was referring to when he indicated that by some measures, China's GDP could prove to be larger than that of America.