What is GDP?

[Smurf1976]

Just remember that GDP is a measure of economic activity but is NOT a measure of wealth creation.

A natural disaster results in considerable economic activity but clearly does not create wealth, indeed it does the reverse.

 

[young-gun]

Inflation is measured by rising prices on a basket of goods and services, So it is seperate to GDP.

You can have increased GDP without having Inflation. Inflation is measured by the prices of a basket of goods over time.

I find it easier to understand inflation by thinking about it as the money supply it's self inflating, More money floating around compared to actual goods and services offered for sale = rising prices, Less money floating around compared to goods and services available = lower prices.

Generally a money supply with either be inflating or deflating, Inflation is generally seen as the lessor of the two evils, So most central banks choose to be leaning towards a steady slow rate of inflation say 3%, rather than slip into deflation.

i've been doing a bit more reading, and just read an article that stated with europe and the US printing so much more money, this devalues the currency and drives inflation (more money than services or products offered), which in turn would further choke spending having the opposite effect to what the central banks desire when offering QE packages? i understand that QE packages are more aimed at fixing major banks balance sheets, most likely in hope that people will borrow again(further their debt) but surely the idea is that somewhere along the line the money ends up in the hands of those that have the potential to stimulate the economy?

anyway my question is when the fed's pull this money out of thin air, does it increase gdp? and is the above statement about inflating prices and choking spending correct at all?

 

[Tysonboss1]

1, i've been doing a bit more reading, and just read an article that stated with europe and the US printing so much more money, this devalues the currency and drives inflation (more money than services or products offered), which in turn would further choke spending having the opposite effect to what the central banks desire when offering QE packages?

2, i understand that QE packages are more aimed at fixing major banks balance sheets, most likely in hope that people will borrow again(further their debt) but surely the idea is that somewhere along the line the money ends up in the hands of those that have the potential to stimulate the economy?

3, anyway my question is when the fed's pull this money out of thin air, does it increase gdp? and is the above statement about inflating prices and choking spending correct at all?

1, The central Banks don't actually have to print cash to create money, most of the money out there is not in the form of cash. The have a few tools in their belt to free up the money supply, But their Brake works better than their accelerator.

2, Yes, the have done alot of work to fix the banks balance sheets and increase the banks to lend, the more money that is lent the more money is created. If banks don't lend and the whole world starts deleveraging it would cause massive deflation and lead us into a long hard depression. Deflation is the nasty big brother of inflation, Hence why the central banks always lean towards a little inflation.

3, The Fed have Billions of reserves at it's disposal, and most of the work it does is just shuffleing how these reserves are held, For example during the GFC it swapped tresury bills it held for toxic assets at cents on the dollar, It ended up making about $150B profit on those toxic assets. It is also in the process of buying longer dated government bonds.

 

[Tysonboss1]

Here is a video series that may be of interest to you, It gives a very simplistic idea of what goes on and is a bit alarmist but it may fill in some of the gaps for you.

Here is video 1 of 5 the rest can be veiwed on youtube.

 

[Starcraftmazter]

Can someone please give me a detailed run-down of exactly what gross domestic product is, how the value is obtained, what relation it has to an economy, why it is so important, and exactly what it's an indicator of. Also if someone could give me examples of good and bad gdp and maybe some current levels. I read about it everywhere and understand its very important but i just dont have a good understanding of the ins and outs of it.

Thanks in advance.

It is whatever the government of the country which calculates it want it to be.
It is estimated based on the information they have available.
It has little relation to the economy.
It is not very important.
It is an indicator of nothing.


This is helpful to understand:
http://www.youtube.com/watch?v=-xCy6sDxnhs
http://www.youtube.com/watch?v=FzEDkFDeJ_A

 

[young-gun]

It is whatever the government of the country which calculates it want it to be.
It is estimated based on the information they have available.
It has little relation to the economy.
It is not very important.
It is an indicator of nothing.


This is helpful to understand:
http://www.youtube.com/watch?v=-xCy6sDxnhs
http://www.youtube.com/watch?v=FzEDkFDeJ_A

great links...really quite amazing

 

[young-gun]

It is whatever the government of the country which calculates it want it to be.
It is estimated based on the information they have available.
It has little relation to the economy.
It is not very important.
It is an indicator of nothing.


This is helpful to understand:
http://www.youtube.com/watch?v=-xCy6sDxnhs
http://www.youtube.com/watch?v=FzEDkFDeJ_A

HAHA what a joke! im upto chapter 16 so far, do you know if these same types of practises are carried out in australia by the gov.? including the altering of true inflation rates to make them appear substantially lower, through these weird and wonderful ways of calculating it?

or are we slightly more realistic?

 

[McLovin]

i understand that QE packages are more aimed at fixing major banks balance sheets, most likely in hope that people will borrow again(further their debt) but surely the idea is that somewhere along the line the money ends up in the hands of those that have the potential to stimulate the economy?

QE is aimed at stimulating the economy, not at fixing bank balance sheets.

anyway my question is when the fed's pull this money out of thin air, does it increase gdp? and is the above statement about inflating prices and choking spending correct at all?

In theory it should, but if the banks aren't lending that money out (and companies are also hoarding it) then the velocity of money will continue to fall, which will mean that the increase in money supply isn't actually going to work. This is what happened in Japan.

 

[young-gun]

QE is aimed at stimulating the economy, not at fixing bank balance sheets.

But isnt buying up the banks toxic debts essentially what they are doing to stimulate the economy? to free up the banks cashflow to allow them to lend?

which is a different approach compared to k rudds $900+ handouts(which i thought would have more of a positive impact on an economy - albeit a temporary one - than buying bad debt?) I guess different problems require different actions.

 

[McLovin]

But isnt buying up the banks toxic debts essentially what they are doing to stimulate the economy? to free up the banks cashflow to allow them to lend?

They are not buying up toxic debt as part of QE. They did as part of TARP starting in late '08. There was of course some cross-over.

Bernanke is a student of the Depression and believed that it's severity and duration was because money wasn't pumped into the system, hence when he sees things looking like they're starting to go bad he floods the system with more cash.

which is a different approach compared to k rudds $900+ handouts(which i thought would have more of a positive impact on an economy - albeit a temporary one - than buying bad debt?) I guess different problems require different actions.

Correct, different circumstances, different decisions. The banking system here isn't screwed.

 

[tothemax6]

QE is aimed at stimulating the economy, not at fixing bank balance sheets.

In theory it should, but if the banks aren't lending that money out (and companies are also hoarding it) then the velocity of money will continue to fall, which will mean that the increase in money supply isn't actually going to work. This is what happened in Japan.

QE is more aimed at: attempting to prevent deflation that should naturally occur, taking pressure of debt-laden governments by monetizing their debt, increasing bank reserves against their callable liabilities (bank deposits) to prevent them blowing up in 'runs', and temporarily depressing interest rates. Any 'stimulation' is a short-term illusion that actually damages the economy.
And yes, if banks are stuffed (like in Japan, with its 'zombie banks'), you get continuous credit contraction, causing deflation, regardless of money printing - until the credit contraction finally clears, and you probably then get an explosion of inflation.

 

[Starcraftmazter]

HAHA what a joke! im upto chapter 16 so far, do you know if these same types of practises are carried out in australia by the gov.? including the altering of true inflation rates to make them appear substantially lower, through these weird and wonderful ways of calculating it?

or are we slightly more realistic?

Hey mate. Terribly sorry, I meant to link you to chapter 16, but I haven't seen that in a little while and got it mixed up a bit, since both of those talk about inflation.

Yes, the Australian government does this as well, the way inflation (actually the CPI) is calculated was changed along with the US, and since then it has calculated the cost of survival rather than the cost of living. Similar to GDP, Australia has the biggest housing bubble in the developed world, so you can imagine where a lot of the GDP growth comes from.

The Chinese government is particularly bad at giving it's GDP statistics, which should always be dismissed. However you can still choose to pay attention to trends. Even given how flawed all these statistics are, we still have trends to follow.

Another problem is the way CPI is calculated changes very frequently (every few years), although no change has been as significant as the one outlined in the Crash Course video.

The banking system here isn't screwed.

Yet. Just a matter of time mate.

 

[McLovin]

QE is more aimed at: attempting to prevent deflation that should naturally occur, taking pressure of debt-laden governments by monetizing their debt, increasing bank reserves against their callable liabilities (bank deposits) to prevent them blowing up in 'runs', and temporarily depressing interest rates. Any 'stimulation' is a short-term illusion that actually damages the economy.
And yes, if banks are stuffed (like in Japan, with its 'zombie banks'), you get continuous credit contraction, causing deflation, regardless of money printing - until the credit contraction finally clears, and you probably then get an explosion of inflation.

1) Assuming you're correct and, it has been done as a preventative measure, why should deflation be allowed to occur? It will hardly fix the problem.

2) How has QE by the Fed "taken pressure of [sic] debt-laden governments"? Inflation is hardly out of hand.

Yet. Just a matter of time mate.

Sure, why not.

 

[young-gun]

Hey mate. Terribly sorry, I meant to link you to chapter 16, but I haven't seen that in a little while and got it mixed up a bit, since both of those talk about inflation.

Yes, the Australian government does this as well, the way inflation (actually the CPI) is calculated was changed along with the US, and since then it has calculated the cost of survival rather than the cost of living. Similar to GDP, Australia has the biggest housing bubble in the developed world, so you can imagine where a lot of the GDP growth comes from.

The Chinese government is particularly bad at giving it's GDP statistics, which should always be dismissed. However you can still choose to pay attention to trends. Even given how flawed all these statistics are, we still have trends to follow.

Another problem is the way CPI is calculated changes very frequently (every few years), although no change has been as significant as the one outlined in the Crash Course video.

all good i ended up watching from your links to the end of the series anyway.

it seems ludacris?! how are they allowed to do that? and their justification appears to simply be 'we falsify figures to make them look more appealing'?

they even use the same method(hedonics) to both lower inflation and increase gdp!

No one change is significant, but i guess you eventually end up with a compounding affect which is evident in the video.

just a touch off topic but i recently read a book that outlined how absurd the US unemployment figures are calculated(as discussed in the video briefly). They did a bit of research and i cant recall exactly, but they came in at around 3 percent higher unemployment than they currently claim(approx 9% i believe).

sorry what trends are you referring to exactly?

 

[Starcraftmazter]

it seems ludacris?! how are they allowed to do that? and their justification appears to simply be 'we falsify figures to make them look more appealing'?

Who is there to stop them? They are the government, and the vast majority of the population don't know enough about economics to understand how screwed they are being.

This is especially bad when you consider that in Australia too, the re-indexing of welfare payments (and government salaries) is done based on CPI. Funny that, when electricity goes up by 15-20% pa, or water at 30%pa, I can't really substitute it for a pedal powered electricity generator and ocean water, and yet if you believe the government that is precisely what we must do

When houses have risen by 9% pa during the last credit bubble, people were not able to substitutde them for cardboard box shelters, and yet inflation was apparently at historical lows

just a touch off topic but i recently read a book that outlined how absurd the US unemployment figures are calculated(as discussed in the video briefly). They did a bit of research and i cant recall exactly, but they came in at around 3 percent higher unemployment than they currently claim(approx 9% i believe).

I believe they keep underemployment figures which are more accurate in relation to how employment used to be calculated, and are currently running at 14 and something percent.

sorry what trends are you referring to exactly?

GDP trends, or the trends of any other statistic. Even if the way it's measured is flawed, if you can take that into account, you the trends of that statistic might still be of some (limited) use.

 

[young-gun]

Who is there to stop them? They are the government, and the vast majority of the population don't know enough about economics to understand how screwed they are being.

This is especially bad when you consider that in Australia too, the re-indexing of welfare payments (and government salaries) is done based on CPI. Funny that, when electricity goes up by 15-20% pa, or water at 30%pa, I can't really substitute it for a pedal powered electricity generator and ocean water, and yet if you believe the government that is precisely what we must do

When houses have risen by 9% pa during the last credit bubble, people were not able to substitutde them for cardboard box shelters, and yet inflation was apparently at historical lows



I believe they keep underemployment figures which are more accurate in relation to how employment used to be calculated, and are currently running at 14 and something percent.



GDP trends, or the trends of any other statistic. Even if the way it's measured is flawed, if you can take that into account, you the trends of that statistic might still be of some (limited) use.

ahh got ya. i guess trendlines also become redundant with every new whacky inflation calculation though. as the quoted rate of inflation gets further and further away from the 'actual' rate of inflation (can only imagine what it might be :S) the trend line would become more and more pointless and less of an indicator?

 

[Smurf1976]

Funny that, when electricity goes up by 15-20% pa, or water at 30%pa, I can't really substitute it for a pedal powered electricity

Haven't you seen the Momentum Energy ad on TV? Seems to be working fine for that bloke... :