Gross Domestic Product Definition (GDP) & New Components

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Gross Domestic Product Definition (GDP) & New Components

Gross Domestic Product Definition (GDP) & New Components from Wikimedia

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GDP or Gross Domestic Product is a very simple term to understand.  Why does it seem so hard?  Because everyone wants you to be confused by it.  Not today.  I am going to explain it and some news about how it is changing.

First GDP is the measure of the dollar value of goods and services produced by an economy.  It is measured a couple different ways, but they all generally come out to the same number.  We can determine it using production, income, or expenses.

  1. Production:  The production approach is to extimate the value of products and services produced by an economy by using the value of materials used to produce it, or how it transfers to analytical data within the economy.
  2. Income: this is basically the addition of wages, corporate profits, farming profits, investment profits, and other businesses that don’t fit these molds.
  3. Expenses: This one is the most commonly used.  It is the sum of Consumption, Investing, Government Spending, and Net Exports.


Typically this kinda works to be an economic indicator based on the assumption that everything that someone is paid, they will spend, on everything made.  We as a society actually DO spend everything.  This also doesn’t measure individual quality of life, but society as a whole based on financial activity.  The majority of people can become poorer, but GDP go up if financial transactions go up by some big players.

Gross Domestic Product Definition (GDP) & New Components

Gross Domestic Product Definition (GDP) & New Components from Wiki (click for larger)

So if GDP is an indicator of our economy, what about inflation?  Well there is a GDP deflation factor that gets multiplied to deflate the current year based on the dollar value of the previous year.

Now let me tell you what has happened very recently that should concern all of us.  According to Zero Hedge, we are now adding corporate promises to the number.  This is what they, sometime in the future, no matter how far in the future, will, may or might pay.  This also includes adding unfunded liabilities to the GDP.  Let me tell you what this means for us.  Before when stupid states like Illinois had a insane amount of Unfunded Pension Liabilities, it was counted as debt.  What is an unfunded liability really?  It is the debt that the state owes for one reason or another, and they have no idea, today or in the future, how that debt can be paid.  This is the debt that doesn’t have a plan to be paid with money OR EVEN MORE DEBT.  Any company that has a pension will have this money counted as income, even though it may NEVER be paid.

So what is happening now, is that every time a state promises more money to someone 25 years in advance, even if they wont receive anything for 25 years, it is counted as a monetary transaction on the GDP.  So instead of the GDP being an indicator of our economic transactions, it will now be that mixed with our debt.

Debt is bad.  We all know that.  A huge indicator of our national wealth is the Debt vs. GDP.  So if I say now that debt brings up the GDP, now the ratio gets way out of whack.  Now the government gets to fudge the numbers so as we do really stupid stuff as states and a nation with debt, it actually helps our economic numbers!

On a personal level, this would be like you promising me 500 in cash 10 years from today, but counting that as your income this year, because everything you spend, you have to get paid from your job.  Now go ahead and do your household budget on this number and see how the debt racks up, which in turn can make your budget grow.  YAY!!!!

So when you see our economists say that the GDP is WAY UP next time around, you will know that it is all smoke and mirrors, and there is NO real wealth there.

But don’t worry guys, it will be alright.  Your working class, in debt, financial advisors will take care of you.  The government will take care of you.  Don’t worry about the man behind the curtain.  Now remember, never attribute something to intent that can be explained by stupidity.

I hope this post will push you to learn what you can about our economic state, but more importantly, to look into hard assets and skills to be utilized when people are hurting and struggling to get by.  These may be the difference in poverty vs. wealth at that time.

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