Monday, November 12, 2012

GDP vs. EE

Double-entry accounting serves commerce well. I don't pretend to know the intricacies of GAAP  beyond what I picked up as an undergrad, but as an improvement over the single-entry ledgers of antiquity, modern standards are fair, transparent, uniform, and reliable. For the purpose for which they were tailored, they serve admirably.

Repurposed, accounting standards may be misleading. Consider national income accounting. National accounts treat sovereign nations as if they were meaningful business entities and estimate* the productive activities within. Annual GDP figures are sort of like a nation's income statement. Recall from your intro to macroeconomics course its components:

GDP = C+I+G+(X-M)


Gross Domestic Product is the sum of the following:

  1. Consumer expenditures, which includes final purchases of new non-capital products. From a business accounting perspective, this would be stuff that gets filed under "expenses". For people, it's everything you buy at the grocery store.
  2. Investment expenditures, which are goods that get capitalized. It's true that the line between expenses and durable assets can be a little blurry at times, but in general, if you buy something that you can apply depreciation to, it counts as investment expenditure. Note again, these are purchases of new capital equipment. A fresh-off-the-floor front end loader would count, a used quarry truck would not.
  3.  Government expenditures, including local, parish, county, state and federal outlays. Note the sign here. G is counted as directly contributing to GDP. Because of this, you might be able to squint your eyes and see how the "growth" camp in Europe could become convinced that more government spending is "good for the 'economy'", in the sense that more G directly boosts GDP (and possibly again using the curious logic that is the fiscal multiplier). There's quite a lot to say about this component, and perhaps I will return to it in another post, but for today, I'd like to consider:
  4. Net exports. X stands for "exports", M for "imports". Again, the idea of (X-M) makes sense for firms. Firms sell what they produce (X) and purchase intermediate goods for transformation (M) or for to run the company or whatever. A firm that has more value coming in the aft hatch than going out is on a fast boat to Puerto de Bankruptia. 

The advantages to using an accounting technique among nations are similar to those for firms: you can write neat ledgers, tidy balance sheets, and give currency traders the information they need to ensure the capital account matches the current account. All very nice and proper.

Except when GDP pulls double duty.

Where GDP is usually referenced by economists and the press is as a proxy for the health and vitality of the economy. Higher GDP per capita tends to correlate well with higher standards of living and better material well-being. There are quite a few things folks consider desirable that track well with high GDP, like lower violent crime, longer life expectancy, lower infant mortality, et al. That's great, but if we're measuring prosperity, it seems kind of perverse to ding your metric for exchanges that happen in one particular direction across one particular type of border. By using GDP as a proxy for prosperity, the deck is sort of stacked against the euvoluntarity of international trade, and this is completely independent of any intertemporal, loanable funds considerations. It's almost tacitly suggesting that imports are something we have to suffer for the privilege of exporting. How strange.

I can perhaps understand how economists might want to concern themselves with prosperity maximization. I'm more puzzled by ones who translate this to "GDP maximization".

I'm sort of curious if folks' moral intuitions towards overseas trade would change if some snickering rogue could convince the profession to switch the sign on imports.

In the past, I've puzzled over which component of EE is violated by international trade, and I have a suspicion that this might have a little something to do with it. Anti-foreigner bias really does seem to be worse (anecdotally, mind you--I haven't done any rigorous research on this) for buying than for selling. Folks seem to be happy to sell American-made goods to the rest of the world, but bristle when it's cheap imports arriving in large ships. Maybe the GDP calculation links moral intuitions to the conventional capacity to exchange. Maybe. What do you think? Are national accounting techniques endogenous to intuition? The other way round? What other plausible stories can be told about the euvoluntarity of international trade and GDP accounting?

Bonus link: Munger on price-gouging and Locke, tied closely with his forthcoming follow-up work on Euvoluntary Exchange. Enjoy.

*Note that I use the word "estimate" and not "calculate". For practical purposes, GDP reckonings are usually close enough as to make little difference for panel comparisons among entities with similar regime characteristics, but rare events can introduce bias into the measure. This phenomenon is extremely interesting and fuels quite a bit of research, but it's a bit off topic, so I won't dwell on it here.

1 comment:

  1. This is a great topic that deserves more attention. You may find an unlikely ally in Warren Mosler, a leading proponent of MMT, who says the following in his book:
    "The real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it must export."
    I provided a link to his free pdf version and your post:


Do you have suggestions on where we could find more examples of this phenomenon?