01 Aug 2013

Private / Government Components of GDP Bask

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I want to look at the official GDP stats of the last 10 years and show the breakdown of private/government components of GDP. I went to the FRED website and took Government Consumption Expenditures plus Government Investment to be “Government GDP,” then took the difference between total GDP and that number, to be “Private GDP.” Then I adjusted these nominal figures by the GDP deflator to put them in real (2009) dollars.

Does anybody have a problem with this procedure? I don’t want to write up a big post and make a YouTube video on the results if people are going to claim that’s not the right way to do it. (If you’re curious why I don’t just grab the BEA’s official “Private GDP” series, it’s because I don’t think they exist. They have “Gross Private Domestic Investment” but I don’t think they have “Gross Private Domestic Consumption,” but I’d be happy to be corrected.)

15 Responses to “Private / Government Components of GDP Bask”

  1. Tel says:

    I’m pretty sure Murray Rothbard had a formula for exactly what you are doing, and a name for it, like GPP or something.

    • Mike T says:

      Yeah, I think it was essentially the same thing as the GDP formula minus the government component.

  2. DesolationJones says:

    Gross Private Domestic Consumption is called Personal Consumption Expenditures.

    • Bob Murphy says:

      How sure are you about that, DJ? I’m just concerned that PCE is a subset of Private Consumption. Like, can businesses engage in consumption spending? After all, government can.

  3. Daniel Kuehn says:

    The detailed NIPA definitions baffle me sometimes. For a blog post it sounds safe, particularly if you lay out clearly what you did.

    For something more formal I’ve emailed the BEA people a couple times for things – they respond quickly to email so it would be worth just running it by them. They’ll know all the weird little exceptions.

  4. Major_Freedom says:

    “Does anybody have a problem with this procedure?”

    I do, but not in the same way that your critics do, and not in the way you might anticipate people having a problem.

    My issues are the usual issues with these sorts of calculations. e.g. They’re more a measure of dollars spent than real goods produced. The “deflator” is arbitrary and crude. Etc.

    Blah blah blah, the usual.

    I think a better measurement would be to consider actual real civilian goods produced over time. Look at how many barrels of oil are being produced, how many cars and trucks, how many housing starts, how many airplanes, televisions, vegetables and fruits, clothing, computers, etc. etc. Make a huge laundry list of goods produced.

    I believe FRED has some data on this sort of thing.

    • Mike T says:

      Yeah, I agree and not to get too particular, but what should also be considered, although I don’t think there’s any way to officially measure it, is the quality/quantity increase/decrease of a good/service at the retail level, e.g. the number of potato chips in the bag.

    • Jason Quintana says:

      I like this better, but I think it is crude as well since it misses qualitative choices consumers make that might trump sheer numerical output of a mass of end products. To measure “total output” to include qualitative issues like this (without attaching a monetary value) it seems to me that we would have to be able to place some kind of “objective” valuation score on each item to come up with some new kind of aggregate figure. It would be like adding up “utils” and coming up with an aggregate hedonic value of utilitarian economic success. This would be a central planner’s dream.

      Years ago I read George Reisman’s book and I slogged through his long section illustrating his aggregate model of spending and capital accumulation. If I remember the gist of it correctly he did a good job of illustrating your point that it isn’t growing spending on final goods that matters. Spending on final goods is just a monetary aggregate. Rather, he argued that the health of the economy rests on sustaining and and expanding the proportion of business profits that are plowed back in to “productive expenditure” with a profit motive on land, labor and capital (either in the same business or on investments in other businesses). This compared to the portion consumed by the owners/investors along with the part syphoned off and consumed by the government. Every penny of government expenditure is consumption since none of it is for profit, and therefore its spending cannot be self sustaining.

      If this thinking is valid then some kind of metric showing us this **proportion** (of business profits used for further “productive expenditure” vs. the proportion consumed in the entire economic system) and its change over time would give us a better sense of whether the economy is sustaining itself (reinvesting enough to replace used up capital etc.), growing (accumulating more productive capacity) or feeding on itself and contracting.

      • Major_Freedom says:

        I think that is a great point. I also remember reading about that.

        It’s probably better than my proposal, and because it doesn’t measure total spending, but a ratio of investment to consumption, we can get a good picture of how healthy the economy is without having to deal with the issues you raised, such as quality adjustment issues.

        It is true that ceteris paribus, the higher the proportion of investment spending to consumption spending, the higher the productivity is. And the added bonus is that, like you said, we can accurately treat all government spending as consumption, so we won’t be spoiling our intended measure of private productivity (investment).

        There are nevertheless drawbacks to this. One is that it will treat the following two economies equally:

        1. 1000 units of aggregate spending, and 800 units of money of productive spending, split between capital goods spending and wage payments 50/50, or 400 units of money each.

        2. 1000 units of aggregate spending, and 800 units of money of productive spending, all of which is wages only, with zero spending on capital goods.

        Economy 1. would be more productive than 2., despite the “ratio” being the same as economy 2.

        So maybe the ratio between aggregate spending and capital goods spending specifically might be an improvement.

        Another drawback is that inflation and deflation of the supply of money and volume of spending will change the ratio, apart from changes in time preference, and hence might give a false signal of the ratio of productive spending to consumption spending driven by time preference.

        • Jason Quintana says:

          These are excellent points. We are still left with a monetary figure measuring a physical body of investment. At best, if getting a good ratio like this were possible it would give us a rough idea about the direction of the economy. Thinking about this is giving me an itch to go back and read Reisman again to try to understand some of his arguments on issues like this better.

  5. Andrew says:

    Correction: The original blog published on Friday, July 19, included a passage that inadvertently mischaracterized economist Robert P. Murphy’s July 18 Senate testimony by taking a portion of it out of context. The caption under his photo likewise mischaracterized what he said. Elliott Negin regrets the errors, which have been corrected.

    unrelated but not sure if you were aware

  6. joe says:

    You simply subtract the public component of real GDP from total real GDP to calculate private real GDP.

    private real gdp growth = 3.14%/year since end of recession

    Q2 2009
    14356.9 – 3096.0 = 11260.9

    Q2 2013
    15648.7 – 2904.4 = 12744.3

    (12744.3/11260.9)^1/4 =
    (1.1317301459)^1/4 = 1.03142041

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