So despite the lousy housing news, the economy grew at a robust 3.9 percent last quarter. Except Rex Nutting says it didn't: "The economy didn't really grow 3.9%, and inflation really wasn't 0.8%. The numbers aren't as good as they look."
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Dreamworld
01 Nov 2007 08:36 am
Comments (5)
This accounting makes perfect sense. GDP measures what is *domestically produced* and the GDP price deflator measures price changes in what is *domestically produced*. Obviously imported oil isn't domestically produced and isn't part of GDP.
Import price changes aren't omitted from the CPI, only from the GDP price deflator. For this reason, the GDP price deflator wouldn't be a good measure of *consumer prices*. Also, of course, the CPI doesn't include crude oil prices, only gasoline prices. The PPI would include crude prices. All this may be confusing to some people.
Also note that GDP also isn't a measure of consumer welfare. If the price of imported oil goes up so much that we all have to work twice as hard and even so, all the goods produced in the U.S. must be handed over to the Saudi Arabians, we will be in some sense worse off. But our GDP will not have gone down. If you want to have a number that measures gross domestic consumption, or gross domestic consumption including leisure, or something, you can create one, but most economists haven't thought that such a thing would be useful.
Matt,
Had the economic growth in the last quarter been terrible, would you as quickly search for a dissenter (no, no, the growth rate was quite good!)? My guess is - no - you would call the dissenter a stooge for the right wing, if you even bothered to acknowledge his existence at all.
Remember that there are a large number of financial types who seem to have staked their reputations on the imminent collapse of the US economy. They are not acting as rational actors right now.
I'm just as surprised as you by the strong growth, but from my perspective, if Tyler Cowen expresses surprise at the numbers, but does not question the underlying data, it's probably a fairly safe bet that the mechanics are sound.
anon and y81 are right. There's nothing wrong with the accounting for GDP*, the problem is with the idea that one number measures "the economy." It's important to understand how much is being produced domestically, to see how likely various supply constraints are to come into play (i.e. inflationary pressures) and to have a sense of how close the economy is operating to full capacity. It's also important how much is being consumed domestically. Over the long run, the two numbers are going to move more or less together, but in the short run they can diverge quite a bit, especially in a country like the US that doesn't face a meaningful external constraint.
Nutting is saying that GDP is not always a good measure of trend s in domestic consumption. Well no; that's not what it's for.
[* Actually there is a serious problem in GDP calculations, which is that excessive adjustments for quality improvements, particularly in computers, were introduced in the late 80s and 90s in a rather politicized fashion. This leads to artificial price declines that are big enough to pull down overall measured inflation. So Nutting is actually sort of right, but for the wrong reasons.]
And, keep in mind that this is a preliminary calculation of GDP growth...things can--and usually do--change when the final numbers come in. Which may take up to a year.
Comments closed November 15, 2007.
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Heads in the Sand
He's mixing up inflation and the GDP deflator. If by inflation we mean the cost of goods that consumers buy, then yes, the GDP deflator is not going to correctly measure inflation. On the other hand, if we need to take total nominal expenditures in the economy and turn it into a real value, i.e. a number representing quantities, then the GDP deflator is correct.
He argues that when the price of imports rises, we should not be saying that implies lower inflation. Well, it's correct that it doesn't lower the CPI, but it should lower the GDP deflator. If the GDP deflator didn't fall, then when the price of imported oil rose, we would say GDP fell, even if we produced exactly as much as before.
Sometimes when things are written by unheard of people on random websites, there's a reason it's gotten no attention from actual economics blogs.
Posted by anon | November 1, 2007 9:12 AM