Barreling headfirst into confusion over GDP accounting
And those who were seen dancing were thought to be insane by those who could not hear the music – FW Nietzsche
So, writing a lot on a topic I would be not surprised to find I completely misunderstand, at a time when more people are starting to read my blog, may seem like a foolish thing to do from a marketing perspective. But I really want to get my head around this. In my last post, I made a rather cryptic and ambiguous remark about the problem of distinguishing between ‘investment’ and ‘intermediate’ goods when calculating NGDP. To extend Bob Murphy’s example from the post that reminded me of my confusion, imagine I am a baker who makes bread by mixing flour and yeast in an oven. The flour and yeast are intermediate goods, and how much I paid for them are subtracted from the market value of bread that I sell in order to calculate my contribution to NGDP. Now, my purchase of the oven counts towards NGDP as a final investment good (right?) and because NGDP doesn’t factor in depreciation, by counting the oven as a final investment good rather than an intermediate good the oven’s contribution to my breadmaking does not get subtracted (Because surely otherwise subtracting depreciation to get Net Domestic Product would seem to be double-subtracting the role of capital goods in production…? That’s my rationale for thinking this, anyway).
If the above is correct, then whether or not we count something as a capital or intermediate good affects NGDP. Imagine that instead of raising flour in an oven, there was instead a magic heat powder that you mixed with the flour and yeast to make bread. Magic heat powder sounds like an intermediate good, not a capital good, and would be subtracted from the market value of the bread I sell when calculating NGDP. But if the magic heat powder cost the same and could produce the same amount of bread at the same rate as the oven, I really can’t see what the economic difference is here. If I am right, it seems when I bake bread in an oven NGDP is higher than if I bake bread with magic heat powder.
On this basis NDP (with “correctly“ calculated depreciation, another conceptual minefield*) looks like a more consistent indicator than GDP. But that still doesn’t answer the question I posed yesterday, which is whether it is more relevant for macroeconomic stability when looking at targeting a certain level of nominal expenditure**. There seem to be (at least in my quite possibly confused mind) a number of deep conceptual issues with ‘final goods and services’.
Now, for the sake of my own sanity, would you please tell me whether you can hear the music?
*Seriously, good luck with that one
**If someone who has more patience with government statistics than I do (occupational hazard) fancied charting up NNDP vs. NGDP over the last ten years, and note how depreciation was calculated, then that would be seriously awesome. As would looking at any past revisions made.