Is the growth of economies like China’s not as impressive as we think it is?

I have no idea why I am writing about economics this fine, sticky day in New York, except for the fact that “Economics for Dummies” is a book I’ve had sitting around for years and am now just inching through.

The two little glow worms of exciting information that I came across are:

1

The GDP (gross domestic product, a measure of the value of all the goods and services produced by an economy in a time period) figure for developing economies can be misleading because chunks of that number are not necessarily reflecting new output. What is actually being shown is an output that can, for the first time, be measured in a way that allows it to be calculated into the GDP.

Hunh?

Well, GDP only measures transactions that involve money, thus a lot of productive work done in rural societies doesn’t get measured. Example: staying at home and caring for your elderly parents, or growing your own food.

As rural societies become more industrial, more of the goods and services are sold. Example: you pay a home nursing aid to check on your parents, or buy groceries.

The result is that output is being measured for the first time in rural societies transitioning to industrial societies. The actual amount of work-energy could be the same-ish, it’s just getting measured now, is how I would phrase it.

So the next time you check out GDP figures for China, India and other countries, think of all those people in developing countries heading to the cities and having their lifeforce output measured for the first time. (See p. 59 of the book.)

2

If you want to forecast where the economy is going, inventory levels are more important than last quarter’s GDP. Why? Because GDP measures output when it is produced, not when it is sold.

Those 10 televisions made in 2004 count toward 2004’s GDP. When they’re sold does not matter. Wait a minute: But GDP is all about money, right, and selling? Well economists pretend that firms “sell” the goods they produce to themselves. They later exchange those goods for money, but that exchange is not the important one for GDP. A high GDP means a lot of “stuff is being produced and put into inventory,” but not necessarily being sold. (Page 64.)

If inventory levels are high, then sales are likely slow, so you might expect that firms will decrease the amount of goods and services they produce in the future. Down the economy goes…

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