Demand and Supply

One of the broadest measures of the economy is Gross Domestic Product (GDP). The Bureau of Economic Analysis (BEA) attempts to measure and calculate the parts of the economy that form the basis of the formula: GDP = C + I + G + NX. They release GDP quarterly and revise the result monthly. Then every few years, the whole calculation is revised again. There are many assumptions and estimates that take time to work through.

GDP is a measure of the consumption of the goods available to economic agents (consumers, business, and government). The largest part of the formula is C, personal consumption expenditures. This part of the formula has been about 66 to 68% of the total for a few decades. Economic policy has come to be constructed around trying to increase the size of C. The theory being that increasing the economy is most effective when policy guides an increase in C.

Another way to look at GDP is to realize that measuring consumption is equivalent to measuring demand. When you realize that concept, then the policy to affect C is based on the idea of increasing consumer demand. The result of this policy is to discourage consumers from saving. Consuming now is better for the economy than saving now and consuming later.

GDP has been around as a concept since the early 20th century. Measuring GDP has been revised many times. While the revisions are driven by economists and technology improvements, the initial construct was political. I’ll have to find the link to a book describing the history of the construction of GDP.

Earlier this summer, the BEA made an announcement they were commencing the production of a new economy wide measure called Gross Output (GO). This measure would also be produced quarterly and follow a revision schedule somewhat like GDP. The eye-opening concept of GO is to measure the output of the economy, or the production of final goods. To use the same terminology as GDP, GO measures the supply within the economy.

I’ll begin to spend some time looking at the differences between the two measures. They are numerous. The categories do not line-up, aggregate growth rates are different, sub-totals are vastly different. This new measure provides a look into the mirror view of the economy and has been lacking in the discussion of how to grow the economy. For now, GO only goes back to 2005, but that is enough data to look at recent changes in the economy and project the near future.

For example, mining is the fastest growing category in the year over year period ending 2014Q2 at 16.1%. That might be a surprise until you understand that mining includes oil and gas production (since it is drilled out of the ground, it is considered mining). Most categories are growing modestly, but mining has been a very strong force within the economy since the beginning of the series.

If GDP is used as a policy directive, then GO should also be expected to be used similarly. Thus, if the political part of the country wants to grow the economy, focusing on the fastest growing part would be a reasonable place to start. Alternatively, you might want to consider growing the largest part of the economy. Mining is only 2.3% of GO, but Nondurable Goods Manufacturing and Real Estate are each 10.1% of the total. Real Estate is problematic as the prices in this category are increasing faster than income and have for several years. Since the physical amount of real estate is fixed, to affect the growth of real estate is only to affect the price of real estate. One result of that policy would be an increase in inflation. Meanwhile, Nondurable Goods Manufacturing is growing at 3.3% year over year. This is less than the overall total of 4.6%. Diving into what constitutes Nondurable Goods and what kinds of policies would impact that part of the economy will be the subject of future posts.

It has been months since I posted. In that period I have come to realize free time is a distant memory. Two jobs are really one too many. In addition, I have been learning some new web technologies. We’ll see if I can incorporate them into something useful here. I have also been getting pressure from the University of Washington to pursue a doctorate degree. After a few months of consideration, that seems impossible due to existing time constraints. While it is still something I am considering, I would need to focus on a particular program, find an institution, and drop one of my jobs. Is it possible to work through a doctorate program with two jobs? I really don’t see how even if I do have the interest. In the meantime, I will continue to practice my writing and analysis skills through this blog.


Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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