I realized my last excerpt might not have alerted professional economists to the fact that I have some novel (I think?) points on GDP accounting in my latest EconLib piece. Some excerpts:
[S]uppose that one method of producing 1,000 cars draws down on the fixed stock of iron ore located in a country’s mines, while another method relies on only renewable resources. Again, standard GDP calculations would score the two methods as equivalent, ignoring the “deductions” from the wealth of the country in the form of mineral resources.
Our discussion of the bread industry revolved around intermediate versus final purchases. If a baker spends $120 buying flour that is used up during the year, then that expenditure does not count in GDP. On the other hand, if the baker spends $10,000 buying a brand new oven, then that is classified as a final good and does contribute $10,000 to that year’s GDP.
However, this distinction is somewhat arbitrary. Suppose that, instead, we calculated GDP over the entire lifespan of a new oven rather than over one year. In that case, the $10,000 spent on the oven in the beginning of the period would be economically equivalent to the $120 spent on the flour; all of these resources would be “used up” in the production of final loaves of bread for consumers. Therefore, the GDP calculation is sensitive to the time period chosen, even though this shouldn’t be relevant to economic well-being.
Also, I clarify why Mark Skousen (among others–including Rothbard in Man, Economy, and State) doesn’t appreciate the emphasis on consumption that the U.S. GDP figures give. My clarification:
To reiterate our earlier discussion, the conventional GDP approach doesn’t include these expenditures by the businesses at each stage in the bread industry because they represent spending on intermediategoods, not final goods. There is a reason for this decision: we want to avoid double counting, so, for example, we don’t want to count the $120 spent by the baker on flour if we’re already counting the $200 spent by consumers on the final loaves of bread. However, the danger here is that the GDP concept gives an exaggerated importance of consumer spending in the overall economy. In particular, even though the $120 spent by the baker on flour doesn’t add anything to the GDP calculation, it is certainlyeconomically critical. If all of the bakers suddenly decided to refrain from reinvesting their revenues in buying more flour, then the output of bread would pretty quickly come to a screeching halt. No matter how much money the final consumers were willing to offer the grocery store owner, she couldn’t sell them any bread if the bakers had previously stopped the gross reinvestment of their proceeds.