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What Happens to GDP when you Remove Government Spending?

phattonez

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Blue is real GDP per capita. Red is the same but after removing government expenditures.

Does anyone else notice a significant widening? Since most measure national wealth with GDP, does this show that GDP is becoming less and less reflective of prosperity?
 
It appears to more be a trend that government spending inflates the numbers without having much of a multiplier effect since the graphs pretty much trend together, but that probly is due to the false assumption that the redline would reflect actual GDP without the spending. It does not. As is, it just shows that the government is increasing its spending as a percentage of GDP
 
Blue is real GDP per capita. Red is the same but after removing government expenditures.

Does anyone else notice a significant widening? Since most measure national wealth with GDP, does this show that GDP is becoming less and less reflective of prosperity?

Including government spending in GDP tends to skew things because a significant percentage of it is merely redistributive. Pretty much all of the Social Security spending is simply pulling money from pile "A" and dumping it into pile "B". What actually causes GDP to rise is the the sale of goods and services. The private sector is actually the driving force of GDP and when that sector is allowed to retain their resources they tend to produce and sell more "stuff".
 
It's significant to me where the red line is in 2000 and where the blue line is in 2000 compared to today.
 
Including government spending in GDP tends to skew things because a significant percentage of it is merely redistributive. Pretty much all of the Social Security spending is simply pulling money from pile "A" and dumping it into pile "B". What actually causes GDP to rise is the the sale of goods and services. The private sector is actually the driving force of GDP and when that sector is allowed to retain their resources they tend to produce and sell more "stuff".

No offense but not true. In fact.. in things like social security.. that's what tends to produce and sell "more stuff"... that's because the money to more people generates more economic activity (essentially GDP)...

I make 1 million dollars in profit a year. Profit mind you.. so that's not the money that I put back into my businesses.. the money I put back into the business does not count as profit.

You let me keep all the profit. Great.. I buy a big house, maybe a few more rentals.

OR.. you tax that money and I pay 500,000 dollars in taxes. and that tax goes to social security, welfare, roads, schools, etc etc.

I still by the bigger house and rentals.. but now hundreds of people have the cash to go by groceries, roads are being built, other infrastructure, kids are getting educated and then creating industries and innovations...

Much more economic activity in the second example..
 
No offense but not true. In fact.. in things like social security.. that's what tends to produce and sell "more stuff"... that's because the money to more people generates more economic activity (essentially GDP)...

I make 1 million dollars in profit a year. Profit mind you.. so that's not the money that I put back into my businesses.. the money I put back into the business does not count as profit.

You let me keep all the profit. Great.. I buy a big house, maybe a few more rentals.

OR.. you tax that money and I pay 500,000 dollars in taxes. and that tax goes to social security, welfare, roads, schools, etc etc.

I still by the bigger house and rentals.. but now hundreds of people have the cash to go by groceries, roads are being built, other infrastructure, kids are getting educated and then creating industries and innovations...

Much more economic activity in the second example..

Your concept of "profit" and what happens to it is incorrect. It's a common misconception but still incorrect.

Let me give you a VERY simplified example:

Alpha Corp. sells widgets. In a given year their gross sales were $1M and their expenses, which include executive compensation of $100k, were $750k. This gives Alpha Corp. a net profit of $250k. Alpha Corp then takes that profit and invests it in new equipment which will allow them to meet production goals more easily.

The profit DOES NOT sit in some bank account waiting to be used. Cash that is sitting static is generally useless because it produces nothing and does not appreciate in value.

Furthermore, if all cash from operating profits was withdrawn from the corporation for personal use then no growth could happen. If a widget costs $4 to produce and sells for $5 then that dollar in profit was taken out of the system there would be no resource with which to produce any more widgets than are already being produced. If, under such circumstances, a customer wanted 10 widgets instead of the 9 they ordered there would be no cash available to cover the production cost of that extra widget unless it was paid for up front.
 
Can we say Ponzy Scheme?
 
The significant widening gap is probably because of the $1 trillion the government spent fighting two wars.
 
Including government spending in GDP tends to skew things because a significant percentage of it is merely redistributive. Pretty much all of the Social Security spending is simply pulling money from pile "A" and dumping it into pile "B". What actually causes GDP to rise is the the sale of goods and services. The private sector is actually the driving force of GDP and when that sector is allowed to retain their resources they tend to produce and sell more "stuff".
Important to note that transfer payments such as SS checks do not contribute to the GDP figures, unlike direct Federal purchases and investment. Defense spending being a primary example.
 
Including government spending in GDP tends to skew things because a significant percentage of it is merely redistributive. Pretty much all of the Social Security spending is simply pulling money from pile "A" and dumping it into pile "B". What actually causes GDP to rise is the the sale of goods and services. The private sector is actually the driving force of GDP and when that sector is allowed to retain their resources they tend to produce and sell more "stuff".

I thought transfer payments like SS weren't included in GDP.
 
Important to note that transfer payments such as SS checks do not contribute to the GDP figures, unlike direct Federal purchases and investment. Defense spending being a primary example.

I thought transfer payments like SS weren't included in GDP.

Actually, they are but it's indirect. If you look at the wiki for GDP you'll see the standard "expense approach" formula and you are correct that those transfer payments are excluded from the "G" (government spending) category but the reason for that is because including them there would be double counting them since they are already included in the Consumption and Investment categories.
 
Your concept of "profit" and what happens to it is incorrect. It's a common misconception but still incorrect.

Let me give you a VERY simplified example:

Alpha Corp. sells widgets. In a given year their gross sales were $1M and their expenses, which include executive compensation of $100k, were $750k. This gives Alpha Corp. a net profit of $250k. Alpha Corp then takes that profit and invests it in new equipment which will allow them to meet production goals more easily.

The profit DOES NOT sit in some bank account waiting to be used. Cash that is sitting static is generally useless because it produces nothing and does not appreciate in value.

Furthermore, if all cash from operating profits was withdrawn from the corporation for personal use then no growth could happen. If a widget costs $4 to produce and sells for $5 then that dollar in profit was taken out of the system there would be no resource with which to produce any more widgets than are already being produced. If, under such circumstances, a customer wanted 10 widgets instead of the 9 they ordered there would be no cash available to cover the production cost of that extra widget unless it was paid for up front.

Excuse me.. but your accounting is way off. because if Alpha corp invests in new equipment.. that's considered a cost and goes against the profit ledger. Replacing and updating equipment are business costs and those are taken out before profit is calculated. If alpha corp took that 250 thousand and invested in new equipment then they could claim NO profit because the new equipment is a business expense.

Now on to your point about profit not sitting in some bank account waiting to be used. A lot of profit IS sitting in banks waiting to be used. Lots of companies and more importantly wealthy individuals are sitting on a lot of cash right now waiting to get into the market. And you do so as a hedge against risk. CD's, bonds, Money markets etc... all make money even though its not much.. but its safe. there is no need to risk all of ones money.

And that's the point regarding who having the money does the most increase in GDP. A thousand dollars going to 100 people in a community buys more groceries, more tv sets, more insurance, more healthcare, more gas, more of about everything which increases GDP more than one hundred thousand dollars going to one person. Its simply fact.

Building more, investing more.. means nothing if you don't have the customers with the cash to by your goods and services.

Furthermore, if all cash from operating profits was withdrawn from the corporation for personal use then no growth could happen
Just to be clear.. "profit" only occurs when you have taken out the cash you don't need for your business. If you put more into your business, it reduces your profit.
 
Excuse me.. but your accounting is way off. because if Alpha corp invests in new equipment.. that's considered a cost and goes against the profit ledger. Replacing and updating equipment are business costs and those are taken out before profit is calculated. If alpha corp took that 250 thousand and invested in new equipment then they could claim NO profit because the new equipment is a business expense.

Now on to your point about profit not sitting in some bank account waiting to be used. A lot of profit IS sitting in banks waiting to be used. Lots of companies and more importantly wealthy individuals are sitting on a lot of cash right now waiting to get into the market. And you do so as a hedge against risk. CD's, bonds, Money markets etc... all make money even though its not much.. but its safe. there is no need to risk all of ones money.

And that's the point regarding who having the money does the most increase in GDP. A thousand dollars going to 100 people in a community buys more groceries, more tv sets, more insurance, more healthcare, more gas, more of about everything which increases GDP more than one hundred thousand dollars going to one person. Its simply fact.

Building more, investing more.. means nothing if you don't have the customers with the cash to by your goods and services.

Just to be clear.. "profit" only occurs when you have taken out the cash you don't need for your business. If you put more into your business, it reduces your profit.

You're very polite but also wrong. While basic maintenance and repairs are often directly expensed more major acquisitions are required to be capitalized and are then expensed over time through depreciation. Unless a choice is made to accelerate the depreciation of a new piece of equipment the cost of it WILL NOT be reflected in the expenses of the corporation. It will, instead, show up as an asset on the corporations balance sheet.

I'm also going to have to have you explain to me the mechanism by which a hundred people spending $1k each does more for an economy than one person spending $100k.
 
No offense but not true. In fact.. in things like social security.. that's what tends to produce and sell "more stuff"... that's because the money to more people generates more economic activity (essentially GDP)...

I make 1 million dollars in profit a year. Profit mind you.. so that's not the money that I put back into my businesses.. the money I put back into the business does not count as profit.

You let me keep all the profit. Great.. I buy a big house, maybe a few more rentals.

OR.. you tax that money and I pay 500,000 dollars in taxes. and that tax goes to social security, welfare, roads, schools, etc etc.

I still by the bigger house and rentals.. but now hundreds of people have the cash to go by groceries, roads are being built, other infrastructure, kids are getting educated and then creating industries and innovations...

Much more economic activity in the second example..

You're not making $1 million in profits if you don't know what the purpose of saved money is.
 
Actually, they are but it's indirect. If you look at the wiki for GDP you'll see the standard "expense approach" formula and you are correct that those transfer payments are excluded from the "G" (government spending) category but the reason for that is because including them there would be double counting them since they are already included in the Consumption and Investment categories.
No, they are not.

1. Expenditure approach

The economy is divided into four sectors: household, business, government, and foreign sector.

C: Consumption is the expenditures of the household sector. It includes spending on 1) durable goods which last for more than one year, 2) non-durable goods, and 3) services.

I: Investment is the expenditure of the business sector, including 1) purchases of new capital goods which are equipment or tools that aids in the production process, 2) changes in business inventories, 3) purchases of new residential housing.

G: Government Purchases is the expenditure of the public sector, such as education and defense expenses. Transfer payments are not included. If Government’s expenditure is greater than taxes collected from business and household sector, government is having a deficit; if government’s expenditure is smaller than the taxes collected, government is having a surplus; if the two amounts are equal, government’s budget is balanced. When there is a budget deficit, government needs to borrow debt from the business, household or the foreign sectors. Government’s debt is usually higher in recession than in an expansion phrase of the business cycle because government needs funding to finance their deficit.

GDP COMPUTATION
 
Another relationship that needs to be taken away from this is that the more the government spends the more the private sector economy suffers.
 
You're very polite but also wrong. While basic maintenance and repairs are often directly expensed more major acquisitions are required to be capitalized and are then expensed over time through depreciation. Unless a choice is made to accelerate the depreciation of a new piece of equipment the cost of it WILL NOT be reflected in the expenses of the corporation. It will, instead, show up as an asset on the corporations balance sheet.

I'm also going to have to have you explain to me the mechanism by which a hundred people spending $1k each does more for an economy than one person spending $100k.

No.. I am not wrong. Capital equipment expenses? Yes.. but again, that depends on your depreciations schedule. If one chooses to.. one can take the full amount that year. We have done that because it worked out best. Its why corporations during good years, will look to make improvments during those years. and that IS reflected in the expenses in the corporation, .. and EVEN if you expense it over 10 years IT STILL is expensed against future profits. So your math still doesn't work.
And that doesn't account for expansions like more help, office space etc.. all of which are expensed that year.

To explain the mechanism of 100 people spending 1,ooo dollars..

Well, first off.. the fact is that 100 people who are poor or middle class SPEND that 1,000 dollars

That person with 100,000 dollars is less likely to spend all of it.

Second, lets say that they do spend all of that.

The 100 indiviudals are going to go out to eat at tens of places... the individual is not doing that

that supports multiple of places that all have employees, all buy produce, all buy and maintain cookers, friars, buildings etc.

Its simply the multiplier of economy of scale.
 
You're not making $1 million in profits if you don't know what the purpose of saved money is.

REally.. do tell. Please explain it to me...
 
Another relationship that needs to be taken away from this is that the more the government spends the more the private sector economy suffers.
Cough....

receipts_income_vs_gdp.gif
 
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No, they are not.

1. Expenditure approach

The economy is divided into four sectors: household, business, government, and foreign sector.

C: Consumption is the expenditures of the household sector. It includes spending on 1) durable goods which last for more than one year, 2) non-durable goods, and 3) services.

I: Investment is the expenditure of the business sector, including 1) purchases of new capital goods which are equipment or tools that aids in the production process, 2) changes in business inventories, 3) purchases of new residential housing.

G: Government Purchases is the expenditure of the public sector, such as education and defense expenses. Transfer payments are not included. If Government’s expenditure is greater than taxes collected from business and household sector, government is having a deficit; if government’s expenditure is smaller than the taxes collected, government is having a surplus; if the two amounts are equal, government’s budget is balanced. When there is a budget deficit, government needs to borrow debt from the business, household or the foreign sectors. Government’s debt is usually higher in recession than in an expansion phrase of the business cycle because government needs funding to finance their deficit.

GDP COMPUTATION

If someone receives $15k in Social Security and spends it on stuff like food and housing it's counted as part of household consumption. If they don't spend that money and just put it in the bank then it's going to be counted under Investment because banks lend that money out to businesses and home buyers.
 
If someone receives $15k in Social Security and spends it on stuff like food and housing it's counted as part of household consumption. If they don't spend that money and just put it in the bank then it's going to be counted under Investment because banks lend that money out to businesses and home buyers.
You can assume that is the case, I am waiting for you to show that, to prove it.

PS...household investment I do not see included in either household expenditures or business investment
 
No.. I am not wrong. Capital equipment expenses? Yes.. but again, that depends on your depreciations schedule. If one chooses to.. one can take the full amount that year. We have done that because it worked out best. Its why corporations during good years, will look to make improvments during those years. and that IS reflected in the expenses in the corporation, .. and EVEN if you expense it over 10 years IT STILL is expensed against future profits. So your math still doesn't work.
And that doesn't account for expansions like more help, office space etc.. all of which are expensed that year.

To explain the mechanism of 100 people spending 1,ooo dollars..

Well, first off.. the fact is that 100 people who are poor or middle class SPEND that 1,000 dollars

That person with 100,000 dollars is less likely to spend all of it.

Second, lets say that they do spend all of that.

The 100 indiviudals are going to go out to eat at tens of places... the individual is not doing that

that supports multiple of places that all have employees, all buy produce, all buy and maintain cookers, friars, buildings etc.

Its simply the multiplier of economy of scale.

Where did the money to buy the equipment come from if not from profits? If it came from financing then that money must have come from someone else's profits.
 
Where did the money to buy the equipment come from if not from profits? If it came from financing then that money must have come from someone else's profits.

It came from the business.. just as the money I pay my employees comes from the business and all the other expenses from pencils to paper to this computer. It didn't come from profit.. because profit is after expenses.

If you want to put an accounting name to it.. it would likely be called gross receipts
 
It came from the business.. just as the money I pay my employees comes from the business and all the other expenses from pencils to paper to this computer. It didn't come from profit.. because profit is after expenses.

If you want to put an accounting name to it.. it would likely be called gross receipts

Sorry, Jaegar, Investment comes from profits. Investment is a capitalized expenditure. It is not counted in the P&L, but is rather a use of profit That is the pure accounting view of the world. Granted, our current tax law allows for expensing of a lot of capital equipment (Section 179 and bonus depreciation), but that for tax purposes, it is not GAAP (accounting convention).

Now, you can make an investment when you company does not have profit, but then that investment money must come from another source.
 
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