GDP = C + I + G + X
(Concept used in the August 9, 2009 and June 7, 2009 Podcasts)Gross Domestic Product is the sum of all final products in a given year. Here, products also include services. However, GDP can also be measured as the sum of all earnings in a given year. The reasoning is that the earnings go towards the purchase of produced goods and services.
We shall focus here on how to go about summing up all the final products. While not perfect, it is the summation of four major components:
- Personal consumption of goods and services (C)
- Gross private domestic investment (I)
- Investment and consumption by Government (G)
- Exports minus Imports (X)
To see what each of these GDP components is made of, please use this link from Colorado University.
Franconomics.com Take: What we have contended in the podcast dated June 7th is the fact that the only ways to boost the GDP, for a recession is defined as two consecutive quarters of negative quarter over quarter GDP decline, is by boosting C or G. When G is boosted by loading up on toxic waste, it would eventually lead to further decimation of GDP, since the toxic waste, as in mortgage backed securities and derivatives there of, sugar coated as legacy assets, are based on mortgages which keep declining in value. "I" or investment by private firms is declining, as is evident from lay offs and bankruptcies. So, we are actually left with no option but to boost "C" or personal consumption, for which citizens should have money to spend! In this podcast, we did the math and calculated that 8 trillion dollars which went (or is on its way) towards saving free riding bankers and financiers could have contributed towards the "C" component instead, had it been divided by 300 million and provided as $27,000 dollars per citizen! Amazingly screwed up economic policies by the current administration, don't you think?
July 17, 2009 Update: Records earnings from Goldman Sachs were in part because they shorted these toxic assets. So, if part of "G" in the equation above is toxic waste, it is decimating the GDP. Further, "C" is reducing. As Robert Reich, a former Secretary of Labor with the Bill Clinton administration writes in a recent blog titled When Will the Recovery Begin? Never, "in a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped."
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