They say it’s an improvement. And, it probably is, but it could make general comparisons to the past more and more difficult. What am I talking about?
GDP- the gross domestic product. You have certainly heard this term, even if you don’t quite understand what it is and how it’s calculated. GDP is the value of all the finished goods (i.e. final) and services that are used each year- by consumers (that’s you and me), by businesses (which means a lot of you, as well), and by governments. The GDP last year was around $ 17 trillion.
But, GDP is a measure of what is used (the “use” economy). It means we don’t measure what we produce very efficiently- that measure is call the gross output. And, while you and I- and most of the general public- have little clue about this measure, we (that’s the US government) has been monitoring gross output since the Great Depression started to end (around the mid 1930’s). But, most of that work was devoted to various specific industries.
Actually, the GDP of a nation is closely related to the standard of living, the economic growth of a specific county. But, it provides no information about the production processes going on. This is akin to examining the cash income for a business- without every taking into account if they are maintaining the same inventory levels, increasing their inventory (which cuts their cash position right now), or decreasing their inventory levels (which increases their cash position, but may make it harder to meet the customer’s needs as demand increases).
Let’s examine the numbers more closely. In 2013, consumer spending was about 68% of our GDP. Government spending was a distant second at 18%, and business purchases comprised about 16%. Yes, that means 102% of our GDP came from these three sectors- How? Because our net exports decreased by 2%, bringing us back down to 100%.
But, now, let’s consider gross output. All of a sudden the picture changes dramatically. With capital spending and inventory buildup, the business sector approaches 50% of the total of almost 29 trillion. Not surprising when you realize that only 20% of the labor force is in consumer businesses, 15% in the government sector, with the rest in service, mining and manufacturing.
As you can see, gross output reflects inventory buildup or drawdown, which gives more information about the various business cycles and activities. So, it probably is a good thing that, as of last month, this data point will be provided to us along with GDP.
