Gross Output vs. GDP

Discussion in 'Economy' started by Widdekind, Jul 10, 2012.

  1. Widdekind
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    Widdekind Member

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    GDP measures total revenue, for new final goods & services. GDP measures total "gross value added" to raw materials (zero value), to produce those goods & services (GDP value). However, new final goods & services, sold at retail stores, were gradually assembled, through many steps, along a "supply chain", with some "net value added" at each step. Intermediate producers buy partial products, add a "bell and a whistle", and pass them on. Their revenues are expenses to the next intermediate producer in the chain, and so on.

    Gross Output (GO) accounts all of those intermediate sales. GO is the total sales volume, over all transactions, even sales of raw materials to intermediate producers, and intermediate products to final retailers. For the US, GO is nearly twice GDP. The ratio of GO/GDP measures both the "length & breadth" of the supply chain.

    During expansions, both GDP & GO increase. But, GO surges more than GDP. The ratio of GO/GDP oscillates pro-cyciclically with the business cycle. The ratio crashes during recessions. Inexpertly, that implies that during upswings, more "bells & whistles" are added to more products; new "luxury" features are added, from new suppliers. The supply chain may lengthen, but it also broadens. Either way, sales volume not only increases over last year on pre-existing (intermediate) products, but new (intermediate) products are sought & supplied. Then, during downturns, those "luxury" features are foregone, as the supply chain contracts to more "necessary" components.

    The large & growing multiplier, between GO/GDP, implies that a surging GDP opens up even more opportunities for business -- first, sales intensify over last year on the old supply chain; and they also "extensify", as the supply chain expands, to accept new inputs not seen before. Roughly, when retailers do +$1 of extra business "at the cash register"; then wholesalers are doing +$2 of extra business "back in the warehouse".




    references
    BEA : Gross-Domestic-Product-(GDP)-by-Industry Data
    Gross output - Wikipedia, the free encyclopedia
    Gross Output I | Wealth Alchemy
     
  2. editec
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    editec Mr. Forgot-it-All

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    Raw materials are NOT part of the GDP?

    I did not know that.

    So when coal (one example) is taken out of the ground that is NOT counted as part of the GDP?

    Or does that mean that until that coal is SOLD, it is not counted as part of the GDP?

    But certainly the wages paid to get that coal must be part of the GDP, yes?

    Seriously questions, here, not editorial comments.
     
  3. Supposn
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    Supposn Senior Member

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    Editec, I’m pleased that you’re unaware of raw material being excluded from GDP because it’s not true. Widderkind has apparently misinterpreted what he read in Wikipedia.

    Sh_t happens and defecation occurs. If I on occasion I can be in error we can’t expect perfection from mere mortals.

    Respectfully, Supposn
     
  4. Widdekind
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    Widdekind Member

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    GDP accounts only new final goods & services. The electricity generated, and sold, when coal is burned, is "GDP". The coal is an "intermediate product", part of "intermediate production":
    GO = GDP (new final goods & services) + IP (raw materials, intermediate products)
    = electricity + coal​
     
  5. Widdekind
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    Widdekind Member

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    the wages paid are implicitly "buried in GDP". But GDP measures total, gross, "retail revenues" to all businesses in the economy each year. Wages are one of their expenses. Over the entire economy, total, gross "revenues" (GDP) equal total gross "expenses" (e.g. taxes, wages) plus "savings" (e.g. corporate profits, personal savings).
     
  6. Supposn
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    Supposn Senior Member

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    Widdekind, if a producer receives production support at lesser or no cost to themselves, the value of that support is not reflected within the finished product.

    This is exactly what occurs when non-profit enterprises provide goods and services at lesser or no cost to attract or retain those producers within their geographic area. Universities, state and local governments often do exactly that. In such cases the produced finished products’ values are to some extent understated.

    But a nation’s entire production, even raw materials and unfinished products are somehow captured by the calculation of their nations’ GDPs. The value of raw materials does not escape the calculation of GDPs.

    This also explains how and why the values of globally traded products, (i.e. their imports and exports) are to some extent understated. All of the nation’s production is reflected within the calculation of GDP but it is not all attributed to global trade.

    Respectfully, Supposn
     
  7. Quantum Windbag
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    Quantum Windbag Gold Member

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    If you think about it, it is pretty obvious, coal is not part of GDP until it is mined. If we counted raw materials as part of GDP it would go up every time new oil reserves were discovered.

    Like I said, obvious, and so simple most people don't think about it.
     
  8. Supposn
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    Supposn Senior Member

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    Widdekind, I agree with you that GDP captures essentially the nation’s entire production.

    You’re mistaken about savings. When writing or speaking casually, economist, (similar to us all), use the words savings and investments as synonyms. They differentiate their use of the words when writing precisely.

    Investments are the dedication of goods and services to hopefully gain more wealth. We extend that to include the expenditure of wealth to purchase those goods and services to be “invested”. Deposits into financial institutions are transfers of wealth rather than investments. Transfers of wealth are excluded from the calculation of GDP.

    Respectfully, Supposn
     
  9. Quantum Windbag
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    Quantum Windbag Gold Member

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    GDP measures the total value of all goods and services, not just final ones. The process of mining and refining raw materials adds to the GDP during the period measured because it is a service that adds to the value of the coal. The final value of the coal depends on what it is used for, which will affect the end value of GDP over the period that the coal is mined, refined, sold, and consumed.
     
  10. Quantum Windbag
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    Quantum Windbag Gold Member

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    Like I said, raw materials are not counted until they are mined. I suppose they could be, in theory, but there is no practical way to estimate the actual value of all the resources available to an economy until they actually enter the business cycle.
     

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