Gross Output I

Whenever I hear someone say the “economy is two-thirds consumption” I just cringe.  It betrays a fundamental misunderstanding of America’s statistical system–the assumption that our economic data is objective.  The reality is that “all data is theory-laden.”

Put simply, who do you think were staffing federal statistical agencies back in the 1930s when many of the statistics we commonly use today began?  Keynesians or  Austrians?  If Keynesians is the right answer, and it is, then it makes sense that the statistics they would create would be most useful in a Keynesian theoretical framework.  Stating that Gross Domestic Product (GDP) is driven by consumption is a tautology.

The reason this view of the consumer-led economy is misleading is that GDP only includes the final sales of goods and services to consumers and businesses. But all intermediate business-to-business (B2B) expenditures are ignored in the measurement of GDP.

For instance, if American Airlines purchases a Boeing 747, the sale would be included in GDP because American is the final end-user of the 747. By contrast, Boeing’s purchase of aluminum from Alcoa would not be included in GDP since the aluminum is an “intermediate input” into the production of the 747. Using GDP as the sole measure of economic activity leads to the strange conclusion that Alcoa is somehow less important to the economy that Boeing.

Fortunately, the Bureau of Economic Analysis (BEA) does track a broader measure of economic activity known as Gross Output (GO). GO not only measures the final sale of goods and services but also measures intermediate B2B expenditures.  As shown in the chart, in 2008, America’s GO was valued at $26.5 trillion—compared to the much lower GDP value of $14.4 trillion.  The difference is B2B expenditures of $12.1 trillion.

Overall, gross output would seem to be fertile ground for Austrians looking for a better alternative to the loaded GDP data.  However, to date, I have only found one Austrian economist, Mark Skousen, who has latched onto its importance–see this article he wrote in The Freeman.  One reason why he would be interested in Gross Output is because he is the author of the excellent book on Austrian capital theory titled “The Structure of Production.”

There is too much about Gross Output to put into one post, so like my previous blog on the private sector, this to will become a regular series here at Wealth Alchemy . . . stay tuned for more analysis and updates using the most recent data.

Components of Gross Output for Years 1987 to 2008

  • The problem with using Gross Output as a susbstitute for GDP (an admittedly flawed data series) is that you end up double counting many sales.

    I buy aluminum (1 sale), I make it into an engine (resources plus labor) and I sell that to an Auto Manufacturer (2nd sale), they combine my product with labor and other materials to complete the manufacturing of an automobile and sell it to a dealer (3rd sale); he adds more labor (marketing, sales, financing, etc) and the consumer buy that car (4th sale).

    There is lots of double counting, far in excess of the value of what was actually produced by the country.

    Now, show me how the gap between GDP/GO can be quantified to provide an insight into what is happening economically, and you will be on to something big.

  • Barry, I like to think of this way. GDP is a measure of “final value” whereas Gross Output is a measure of “economic activity.”

    Consider this hypothetical: In your example, the dealer could be destroying value, by selling the car for less than the cost of its inputs (capital and labor), yet all of the cash-flow generated by each sale in the supply chain supports the paychecks to their respective workers and profits for their owners. Has economic activity diminished because the dealer was foolish in his pricing?

    Maybe a bit because the dealer loses money, but the rest of the upstream production continues on its merry way. So is “value” really the best way to measure the economy?

    Please stay tuned to my next GO post, forthcoming, which will shed light on your final question between the interplay of GDP/GO

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