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Is the GDP formula wrong?

mongoose
Posts: 3,500
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9/22/2011 7:01:35 PM
Posted: 5 years ago
The GDP formula is comsumption + investment + government spending + (exports - imports).

However, say you have two countries, Country A and Country B. Country A produces 2 units of Good A, and Country B produces 2 units of Good B. They are of equal value, let's say $10. They then trade, one unit of Good A for one unit of Good B. So now each has a unit of Good A and a unit of Good B. You'd think that the GDP of each country would be $20, as they produced $20 worth of goods each. However, for both country, you have:

$10 + 0 + 0 + ($10 - $10) = $10

The equation says that GDP is $10 for each country. This means that the net production of the two countries together is not equal to their GDP's added together. What do you think the formula should be?
It is odd when one's capacity for compassion is measured not in what he is willing to do by his own time, effort, and property, but what he will force others to do with their own property instead.
Ragnar_Rahl
Posts: 19,297
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9/22/2011 7:09:46 PM
Posted: 5 years ago
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
mongoose
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9/22/2011 7:14:00 PM
Posted: 5 years ago
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else. I'd think it would go under consumption.
It is odd when one's capacity for compassion is measured not in what he is willing to do by his own time, effort, and property, but what he will force others to do with their own property instead.
darkkermit
Posts: 11,204
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9/23/2011 9:09:28 AM
Posted: 5 years ago
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else. I'd think it would go under consumption.

It's definitely under consumption then. The GDP formula is wrong for many other reasons though.
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Ore_Ele
Posts: 25,980
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9/23/2011 10:25:31 AM
Posted: 5 years ago
At 9/23/2011 9:09:28 AM, darkkermit wrote:
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else. I'd think it would go under consumption.

It's definitely under consumption then. The GDP formula is wrong for many other reasons though.

It's not "wrong," it just isn't a good measuring stick.
"Wanting Red Rhino Pill to have gender"
darkkermit
Posts: 11,204
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9/23/2011 10:46:41 AM
Posted: 5 years ago
At 9/23/2011 10:25:31 AM, Ore_Ele wrote:
At 9/23/2011 9:09:28 AM, darkkermit wrote:
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else. I'd think it would go under consumption.

It's definitely under consumption then. The GDP formula is wrong for many other reasons though.

It's not "wrong," it just isn't a good measuring stick.

Well If I personally make myself dinner instead of ordering out, the latter is added onto to GDP while the former is not, even though the same amount of goods is produced.
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Ore_Ele
Posts: 25,980
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9/23/2011 11:09:56 AM
Posted: 5 years ago
At 9/23/2011 10:46:41 AM, darkkermit wrote:
At 9/23/2011 10:25:31 AM, Ore_Ele wrote:
At 9/23/2011 9:09:28 AM, darkkermit wrote:
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else. I'd think it would go under consumption.

It's definitely under consumption then. The GDP formula is wrong for many other reasons though.

It's not "wrong," it just isn't a good measuring stick.

Well If I personally make myself dinner instead of ordering out, the latter is added onto to GDP while the former is not, even though the same amount of goods is produced.

But the value of those goods is not the same.

Let's say you can make dinner for $10 (cost of ingredients), or eat out the same dinner for $40. If you choose to eat out, you are saying that you value the food at or above $40, so it is a good deal (or, you're saying that you value your time and effort difference as more than $30). If you make it yourself, you are saying that it is not worth $40, but only $10.

Since the GDP measures everything in dollars, the first thing that needs to be done is to convert everything into dollar. But to do that, you need to know what it is worth. How do you know what something is worth? Well, the most accurate way is to see how much people will pay for it.

So even though the two options are the same thing, because there is a difference in the amount you are willing to pay, there is a difference in it's actual value and there is a difference in how it affects the GDP.
"Wanting Red Rhino Pill to have gender"
darkkermit
Posts: 11,204
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9/23/2011 12:44:06 PM
Posted: 5 years ago
At 9/23/2011 11:09:56 AM, Ore_Ele wrote:
At 9/23/2011 10:46:41 AM, darkkermit wrote:
At 9/23/2011 10:25:31 AM, Ore_Ele wrote:
At 9/23/2011 9:09:28 AM, darkkermit wrote:
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else. I'd think it would go under consumption.

It's definitely under consumption then. The GDP formula is wrong for many other reasons though.

It's not "wrong," it just isn't a good measuring stick.

Well If I personally make myself dinner instead of ordering out, the latter is added onto to GDP while the former is not, even though the same amount of goods is produced.

But the value of those goods is not the same.

Let's say you can make dinner for $10 (cost of ingredients), or eat out the same dinner for $40. If you choose to eat out, you are saying that you value the food at or above $40, so it is a good deal (or, you're saying that you value your time and effort difference as more than $30). If you make it yourself, you are saying that it is not worth $40, but only $10.

However, you still value it above $10 if you consider how much you value your time. If you value your time at $29, then I would not eat out. However, although the difference in value is "$1", GDP measures the difference by $30.

Since the GDP measures everything in dollars, the first thing that needs to be done is to convert everything into dollar. But to do that, you need to know what it is worth. How do you know what something is worth? Well, the most accurate way is to see how much people will pay for it.

Although the amount of surplus is the area between the supply and demand chart and the quantity from 0 to equilibrium. This area measures wealth and the area can be various sizes. For example, most people would have to be paid at least a million dollars to give up internet, even though the cost of the internet is very cheap.
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Ragnar_Rahl
Posts: 19,297
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9/23/2011 1:29:48 PM
Posted: 5 years ago
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else.
I wasn't talking about the traded for unit, I was talking about the unit that was made that didn't get traded.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
mongoose
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9/24/2011 11:13:20 PM
Posted: 5 years ago
At 9/23/2011 1:29:48 PM, Ragnar_Rahl wrote:
At 9/22/2011 7:14:00 PM, mongoose wrote:
At 9/22/2011 7:09:46 PM, Ragnar_Rahl wrote:
You said they produced two units each but only traded one of those units for one of the other. That means the other unit was either consumed locally or is inventory-- investment-- wherever you add it the sum should be 20 bucks.

I don't think a formula worth a damn can be made, but this particular flaw doesn't seem real.

My economics teacher said the traded-for unit didn't add to anywhere else.
I wasn't talking about the traded for unit, I was talking about the unit that was made that didn't get traded.

So what are you saying each variable is? What is Consumption, what is Exports, and what is Imports?
It is odd when one's capacity for compassion is measured not in what he is willing to do by his own time, effort, and property, but what he will force others to do with their own property instead.
Ragnar_Rahl
Posts: 19,297
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9/25/2011 6:40:52 PM
Posted: 5 years ago
Country A produces units A1 and A2, country B produces units B1 and B2. Each unit has a value of 10 dollars.

A1 is traded for B1.

Country A consumes B1, 10 dollars, and A2 is now inventory, 10 dollars, 10+10=20.

I see what you're saying now, your teacher makes no sense, imports are definitely consumed (unless themselves added to inventory for whatever reason). Since exports and imports are equal here they still zero out of course.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
RoyLatham
Posts: 4,488
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10/7/2011 1:18:20 PM
Posted: 5 years ago
Yes, the error is the failure to add imports to either consumption or investment. The imports have to go somewhere. If a Pacific island exports $20 million in bat guano and imports $20 million in Spam, the GDP is $20 million, not zero.