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Gross Domestic Product Explained in Layman’s Terms


By —— Bio and Archives--October 19, 2018

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Gross Domestic Product Explained in Layman’s Terms
Every time I start to write about the economy, I worry that I might drill down too deep, because most people don’t care as much about the details of the economy as they care about how much money is in their bank accounts and wallets. I get that, but I think it is important to offer some thoughts on the internals of the economy that may or may not be known to most. As I used to teach my students, it is the interconnectivity of things that really give us the best picture of what is really going on in the economy. Unfortunately, most of the talking heads on TV are quick to speak in jargon, spout numbers that are hedged by probabilities and predict economic performance without context.

What is often overlooked is the impact that adjusting the trade balance has on the GDP

The Gross Domestic Product is a course measure of the income of the nation based on the value of final goods produced and other factors. The operative word is “course.” As precise as the talking heads would like to imply about the GDP, it is simply a crude aggregation.

The GDP is most easily explained in the following formula: GDP= C + I + G + (X-M). Here, C is consumption, I is investment, G is government spending and the rest is exports minus imports. In recent years, C + I is around 80%, G is about 25% and X-M is –5%. WE could get into the accelerators, the Keynes Multiplier, etc., but I think it best to talk about the big chunks.

If we have more money in our pockets and businesses have more money to invest, then one can see that the GDP will grow. Of course, some would argue that giving more income to the people and business will reduce the amount of money that Government can spend. This does not play out. If consumers and business es have more money to spend, that means the tax base has broadened and that there will be more money coming into the treasury. Art Laffer, with his famous Laffer Curve, provides graphic proof that reducing marginal tax rates actually works to the advantage of government revenue collection. By the way, this has always been the case whenever tax cuts have been tried. The Kennedy tax cuts led to positive GDP growth for over a decade as did in the Reagan era tax cuts.

What is often overlooked is the impact that adjusting the trade balance has on the GDP. The US has a negative trade balance of around $800 billion. That is roughly 4% of the total GDP. Imagine if we were able to change the trade imbalance by $400 billion. That would allow that money to be shifted to the positive side instead of being a negative. The $400 billion would be used for investment or consumption, thus doubling the impact of that shift in trade balance.

 

One other factor that is often overlooked is the impact of foreign direct investment

One other factor that is often overlooked is the impact of foreign direct investment. This is the money brought into the country by foreign enterprises that counts in the investment numbers. If Mercedes Benz builds a billion dollar plant in Tuscaloosa, AL, then that billion dollars is counted in the GDP. By having a business-friendly tax structure, foreign companies are more likely to invest. The greater the investment, the greater the GDP .

I do not hang my hat on any single economic indicator, but I do think looking at the GDP is a great way to look at the interaction of economic factors at play in the US and world economy. The US produces roughly 20% of the world GDP, placing the US as clearly the strongest economic engine in the world. Like good real estate attracts more money, a strong economy attracts stronger investment. More Promises Made and Promises Kept.

 


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Dr. Sam Clovis -- Bio and Archives | Comments

Samuel H. Clovis, Jr., Doctor of Public Administration
Liston to Sam on LATalkRadio, Sundays: 1:00 to 3:00 PM (PST)
(Impact With Sam Clovis)

Sam Clovis was raised in Kansas and attended the United States Air Force Academy, serving for 25 years on active duty as a fighter pilot.  He retired as a Colonel and the Inspector General of NORAD and the United States Space Command.


Sam served as a Fellow at the Homeland Security Institute, contributing in national preparedness and immigration policy.  He recently served as a tenured full professor of economics at Morningside College.


Sam has a BS from the Academy, an MBA from Golden Gate University and a doctorate from the University of Alabama.  He served as national co-chair and chief policy advisor for the Trump for President Campaign, was a policy director during the transition period and served as the Senior White House Advisor to the US Department of Agriculture.  He currently lives in rural Iowa.


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