Lady Brin

GDP and PPP

4 posts in this topic

I was earlier reading the thread "What Will Happen to US Debt.?" This may sound ridiculous, but I can't seem to keep GDP [my brain wants to say data instead of domestic] in focus for the reasons that I know just enough about economics to be dangerous and when I was in school it was called GNP. Looking it up once again [from Wikipedia]:

Until the 1980s the term GNP or gross national product was used. The two terms GDP and GNP are almost identical. The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + investment + government spending + (exports − imports)

Two questions:


  1. [1]Why is GDP *almost* identical to GNP? I don't have an old text book, but the above is how I remember it.
    [2] What is the direct effect of (exports - imports) on a service economy?

Next, also from Wikipedia:

In economics, purchasing power parity (PPP) is a theory which says that the long-run equilibrium exchange rate of two currencies is the rate that equalizes the currencies' purchasing power. This theory is based on the law of one price, the idea that, in an efficient market, identical goods must have only one price.

I have never understood this theory [worse, on auto-pilot PPP represents Pitiful Poor Planning to me]. What merit might it have (or is it similar to *concept* with unit and measurement omission, which is maddening because why is it called a theory)? Otherwise, I can't think of a single example.

I ask because I understand Miss Rand's Capitalism, The Unknown Ideal, but theories throw me for a loop. For context, I only took the required Economics for a BBA in Marketing, but I'm somewhat amazed I made straight A's (in fact, I only had a 2.3 GPA when I switched from Biology to Business and in '77 graduated cum laude, missing magna by like .2395672 :P ).

Brin

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I can't seem to keep GDP [...] in focus for the reasons that I know just enough about economics to be dangerous and when I was in school it was called GNP. Looking it up once again (from Wikipedia):

Until the 1980s the term GNP or gross national product was used. The two terms GDP and GNP are almost identical.

Two questions:


  1. [1]Why is GDP *almost* identical to GNP? I don't have an old text book, but the above is how I remember it.

My non-expert understanding is that in gross national product, "national" refers to calculations made from the perspective of nationals of the jurisdiction--that is, residents and citizens (whether resident or non-resident). However, "domestic" refers to the measures made within the physical jurisdiction regardless of the nationality of the people engaging in the economic activity.

The reason why they are almost identical is that, compared with the size of the whole economy, there is not much economic activity performed by nationals outside the jurisdiction.

I don't know for sure why economists now use "domestic" rather than "national"; however, my guess is that it is not only more difficult for the mandarins to measure the activity of those persons outside their jurisdiction, but also the activity within the jurisdiction may be of more relevant to their central-planning purposes.

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May I reccomend the book The Power of Productivity by William W. Lewis. It explains very clearly the fallacy of using GDP to measure the productivity of a country's economy and instead focuses on sector measurements and the PPP measurement. I'd highly reccomend it.

Unfortunately, I don't have time to paraphrase right now (although I might be able to return later) but I think this book is very helpful. The part on GDP and PPP is in the first chapter.

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There is a small difference between GNP and GDP. Both are calculated using the same formula and differ only in terms of whom to include. GNP includes any national of the country for which GNP is calculated, no matter where they work. GDP includes any person within the country for which it is calculated.

I believe that your concern about how the word “theory” is used in economics today is valid. From my experience, most economists (indeed most academics anywhere it seems) take theory to mean something like “non-self-contradictory abstraction” and care not about how they get to such an abstraction, just so long as the conclusions of the abstraction “match reality.” What they don’t understand is that given a set of data points, there are an infinite number of ways to explain the data (mathematically). Equations that will give the correct positions of the planets/sun while assuming that the Earth is in the center of the universe are in this category.

As to the content of the “theories” you ran into, I think it’s a bunch of hogwash (what is hogwash anyway?). I believe that it’s an attempt to try and predict human behavior which is impossible in any aggregate manner since humans have free will.

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