Do DUers know the significance of the equation: GDP = C + I + G + (X-M) ??

[HamdenRice]

Poll question: Do DUers know the significance of the equation: GDP = C + I + G + (X-M) ??

I was thinking of explaining the stimulus package in terms of this well known formula in GD, but I wasn't sure whether it would be obvious or condescending to do so.

So I'm asking the readers of this forum first. Also would appreciate if you express an opinion as to whether you think the average DUer knows this concept even if you do.

[rpannier]

1. I hate admitting when I'm uninformed about something

But, I'm willing to do so in order to learn more.

[GliderGuider]

2. Explaining it with only secondary reference to the equation would be better

I doubt many DUers would know that formula. A basic explanation of the components and a brief discussion of how it describes GDP would be useful. Then you could relate it to the stimulus package.

But do it primarily in narrative. Using the equation up front is a sure way to empty the room.

[HamdenRice]

3. Point taken, I won't start out with the formula

but for those who don't know the formula but have a basic grasp of how simple algebraic formulas work, it can be a very useful tool for understanding fiscal policies like the stimulus.

[Jim__]

4. Any discussion of economics is worth the effort - especially now.

But, I'd be surprised if most DUers weren't somewhat familiar with the concept of GDP and how it is computed.

[notesdev]

5. The equation to worry about is

crushing debt + more spending = not a good answer

[GliderGuider]

7. Or this one:

i=December
Σ Jobs lost(i) = 1.2x10⁷
i=January

[fasttense]

6. Here's a formula

Middle class - job losses = NO consumer spending + massive default on debt.

[pinqy]

8. The fun part is that...

...(rewriting "GDP" as Y), C is a function of (Y-T) and G is a function of T and since T is also a function of Y, then Y becomes both a dependent and independent variable in the same equation: Y=C(Y-T)+I+G(T)+(X-M) This drives mathameticians crazy.

[HamdenRice]

9. About 30 years ago, for my programming final, I wrote a BASIC program using that feedback...

to explain stagflation. It also included the effect of borrowing on interest rates.

I can't program like that anymore, of course. IIRC, the way we did feed back modeling back then was to make the C in quarter x+1 a function of T (and other variables) in quarter x. In other words, you calculate C in the second quarter based on data from the previous quarter.

That's how programming really changed the way economic math was done.

Spread sheet programs hadn't been invented yet.

I could be completely wrong, because my memory of this is very hazy because it was so long ago.

[Odin2005]

10. IIRC its GDP = Consumption + Investment + Gov. Spending + Net Exports

Correct?

[HamdenRice]

11. Yes. It helps explain why, with the collapse of consumer spending ...

in standard Keynesian fiscal policy, the government is supposed to drastically increase spending.

That's the basic justification for the stimulus plan. But it also shows how persistent import export deficits are a huge tax-like drag on growth.

[Odin2005]

12. Yep. which is why outsourcing has screwed us over.

In a healthy economy imports and exports should be fairly balanced, should they not? Otherwise you will end up with an unsustainable flow of currency from the importer to the exporter. If the exporter has controls on the value of it's currency (like China does) this causes even more distortion, if the Yuan was a freely floating currency it would rise in value relative to the Dollar, discouraging exports and encouraging imports, right?

[HamdenRice]

15. The repugs should be called on promoting unbalanced free trade while demanding tax cuts

The trade deficit basically wipes out the effect of tax cuts.

On the other side, I agree that in the long term unbalanced trade is unsustainable, but poor countries have used surpluses of exports over imports to develop -- especially the Asian countries, Japan, Korea and now China. I think there was a sense that the wealthy countries could tolerate a little mercantilism from Asia, but they always go overboard in allowing too much.

[anigbrowl]

21. It strikes me that while the US is a very successful exporter of...

intellectual property and services, these require far less domestic capital investment than manufacturing. For example, while an iPod is assembled in Asia out of Asian-manufactured parts, the design work is done in the US, which is win if you're an apple shareholder since the things sell like hotcakes. The same is true for things like CPUs etc...they tend to be fabricated abroad, but designed here.

However, since R & D spending is usually only a few percent of a company's budget, the result is a fairly low degree of domestic capital investment. If you're a great electronic engineer/scientist (or hold some equivalent skill in a different industry) then the US is still one of the best places to work and earn money since we are very good at designing new products. But since cutting-edge scientists and engineers make up only a small part of the population, the much greater number of people whose labor consists of production rather than innovation are in a bind, since they have to compete with much larger workforces overseas for jobs which require a lower degree of skill (and can thus be performed by a larger number of people than highly specialized tasks such as designing a new iPod or whatever).

Much as I'm into economics I'm not a trained economist, so I'd like to know how Keynsians (or other theorists) reconcile trade imbalances with the Theory of Comparative Advantage, which suggests that economies should specialize in what they do best and most efficienctly? From a manufacturer's point of view, if you can have your product made in China to the same level of quality as it's made here (and this is true for many things, like it or not), then it makes sense to produce your product or parts of the product wherever it is cheapest to do so, and reap a greater profit by either pocketing the savings or offering it to the consumer at a lower price and selling more units.

I'm particularly interested in this,a s I've worked for a couple of small technology companies which ran into exactly this problem - they weren't able to launch products at a sufficiently low price to generate strong consumer interest, and as a result saw low unit sales and the business failed, even though there were designs and demand for further models.

[pinqy]

13. Or lower the interest rate...

Since I is a function of the interest rate.

[HamdenRice]

14. That's the monetarist approach

although I think the consensus is a mix of fiscal and monetary policy works best.

The problem now with interest rates is that they are effectively zero and "there's no where to go," which means we are in the dreaded "liquidity trap" that Krugman predicted.

[anigbrowl]

20. We seem to have run out of room for maneuver in that area :-(

[Citizen Number 9]

18. I'm ready, dammit.

We already have a $1.2 trillion deficit going. How could it really be any worse? Let's throw caution to the wind.

I want to see some really profane, really offensive amounts of money spent by the new administration.

I don't mind fixing existing roads, but I hope to hell they don't want to build new ones.....

[Joanne98]

16. I have no idea!

[Mike 03]

17. Yikes. I should know this. I think I know what the C and the I stand for.

The rest puzzles me, I'm ashamed to confess.

[unlawflcombatnt]

19. We need to reduce M, and increase X

In fact, we need to greatly reduce M (imports), since we probably can't do much to increase X (exports) when the world economy is crashing.

With $2 trillion in imports, there's a lot of room for reduction, and a lot of room to reduce import demand and foreign employment, while replacing it with domestic demand and American employment.