07 Nov 2016

Murphy Twin Spin

Economics, Shameless Self-Promotion 6 Comments

==> The latest episode of Contra Krugman has Tom and me discussing the FBI. (We are experts.) But for real, some good stuff on affirmative action.

==> My new EconLib is up, on problems with GDP accounting. An excerpt:

People often use the GDP formula to erroneously derive conclusions about economic causation. For example, in the wake of the financial crisis of 2008, some proponents of “stimulus” spending argued that a boost in government spending on infrastructure would obviously raise GDP because the textbooks tell us that GDP = C + I + G + (X-M). If the government increases G, according to this argument, GDP obviously must increase, as an increase on the right-hand side of the equation “had to” be balanced by a comparable increase on the left-hand side.

However, the textbook formula does not mean that (say) a $100 billion increase in G must go along with a $100 billion increase in GDP. For all we know, a $100 billion increase in G might cause a $40 billion drop in private consumption (C) and a $60 billion drop in private investment (I). In this case, GDP would remain unaffected, and the private sector would shrink to perfectly offset the growth in government. The textbook GDP formula is consistent with both outcomes, so the accounting tautology, by itself, tells us nothing about the impact of an increase in government expenditures on the economy.

6 Responses to “Murphy Twin Spin”

  1. John Arthur says:

    Hi Bob,

    Doesn’t empirical evidence suggest that the multiplier is greater than one, though not much greater? So, does it appear that there is not complete crowding out? There is usually some and does this to vary from business cycle to cycle and over the business cycle? Also, do we not need to look the efficiency of Government spending versus private sector spending, which I suspect the national accounts do not assess?


    John Arthur

  2. Jan Masek says:

    Dr. Murphy, a question for you please: how can nominal GDP EVER rise for reasons other than money printing?
    For example: if Robinson and Friday catch 1 fish a day and they have 10 ounces of gold, nominal GDP is 10 ounces (per day). If they then make a net and catch 10 fish a day, and they still have 10 ounces of gold, nominal GDP will still be 10 ounces, just the price of fish will go down to 1 ounce per fish. Real GDP went up 1000% but nominal GDP hasn’t changed.

    What am I missing? I must be, because no matter the “pitfalls” in GDP accounting, Austrian economists still find ” the concept of GDP useful”. If I was right, it would be totally and utterly useless.

    • Bob Murphy says:

      Jan, well, most economists use “real” GDP, and that’s what I meant when I said it was still a useful concept.

      If you’re asking, “Would it have been better for the world if Kuznets never invented it?” maybe so. Probably.

  3. Jan Masek says:

    Thank you Dr. Murphy. I agree real GDP is what you meant, sorry I didn’t say so.
    And real = nominal / deflator so if you get the deflator right you get the real GDP right, in principle. But am I right and is it accepted by mainstream that nominal GDP can only ever change if money stock changes? Or is it more nuanced, e.g.money velocity comes into equation?

    • Bob Murphy says:

      Yes, velocity comes into play Jan. E.g. if demand to hold (real) money balances falls in half, then prices double. But if real GDP stays the same (let’s assume for sake of argument), then nominal GDP doubles. In terms of MV = PQ, you have a doubling of V and a doubling of P.

      • Jan Masek says:

        Thank you Dr. Murphy, makes sense. It’s elementary really, I should have known that. It’s just that during college I kinda tuned out and started paying attention only after I read MR and you, so your quibbles about the nuanced deficiencies of GDP are easier for me to grasp than the basics which I should know but slept through back in the day.. 🙂 so thank you.

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