Since the spring of 2014, the US Bureau of Economic Analysis quarterly publishes statistics for another indicator. It is called “gross output” (VP) and will be a measure of total sales at all stages of production. The new indicator is almost double the GDP - the standard criterion for the release of final goods and services for the year that was developed fifty years ago. There are still discussions among economists on how to correctly evaluate the growth of the national economy.
The concept and its definition
The concept of gross output is used in the UN System of National Accounts (SNA) and the methodology for assessing economic growth. It is equal to GDP plus intermediate consumption. The new indicator reflects the total, rather than final, sales of all enterprises for the reporting period (year or quarter). Government and household expenses are also included in the calculation. To obtain clean products, the value of intermediate goods and services is deducted.
Production concept
The statistical definition of gross output depends on the definition of another term. This is a production. Some economic flows and activities are excluded from the calculation because they are not related to the business cycle. They include a number of foreign transactions, income from property rights, transfers, land sales, various government payments, unpaid homework and volunteer work. All this is reflected in the concept of production. On the other hand, gross output includes a number of dual activities. For example, the imputed cost of renting a property occupied by the owners.
New stats
The legendary investor Mark Skusen in his work “Production Structure” introduced a new economic unit. Gross output has been the subject of its study since 1990. Even then, he understood the shortcomings of GDP and tried to find an indicator that would become a criterion for spending throughout the entire production process, and not just the final result. Gross output is, according to Skusen, his personal triumph, for which 25 years are not at all a pity. A feature of the new indicator is that it illustrates all stages of the business cycle. Therefore, it is more consistent with the theory of economic growth.
GDP and gross output
Nobel laureate Simon Kuznets, who was the direct developer of the concept of final goods and services, understood the shortcomings of his indicator. Over time, critics offered many analogues, but not one of them was not widely used. The value of gross output is already being used by the American Bureau of Economic Statistics, and it has every chance of gaining popularity. GDP is a good measure of the economic productivity of a national economy.
But he has a significant drawback. GDP limits itself to final products, in most cases ignores or downplays the results of intermediate stages of output. For example, journalists constantly describe consumer and government spending as the driving force behind the economy. They make up 90%. And private investment is only miserable 13! Thus, concentrating only on the final output, GDP minimizes the money spent and economic activity in the early stages of the production process. It is as if manufacturers, suppliers and designers hardly contribute to the overall growth.
Benefits of the new metric
Gross output is an indicator that exposes GDP deficiencies. The work of Mark Skusen gives many advantages of its use.Among them are the following:
- Gross production more accurately characterizes the drivers of economic development. This indicator is a comprehensive measure of economic activity. If you apply it, it turns out that consumer spending is only 40% of total sales, and not 70%. And the impact of private investment is much greater, because they are responsible for 50% of economic activity. And this is more consistent with common sense and the conclusions of scientists. Consumer spending is a consequence, not a reason for prosperity.
- Gross output is more sensitive to the stages of the business cycle. During the 2008–2009 World Financial Crisis, nominal GDP fell by only 2% (government spending played a role). Gross output decreased by more than 7%, and intermediate consumption by as much as 10%. After the crisis, GDP increased by 3-4% per year. The new indicator reflects gradual growth.
Discussions around the VP
The key problem of the economy is the need to get rid of “double counting”. And the calculation of gross output is based on it! However, a product can be sold countless times: as a resource, as a result of production, to wholesale, and then to retail customers. GDP excludes double counting, measuring only the value added created at each stage. However, in this case, we lose the vital business decisions that are made during the production process. Therefore, one can hardly concentrate only on value added!
History of Measuring Economic Growth
The past century has passed under the auspices of a set of revolutions of the internationalization of economic life. There was a need to compare the economic growth of different countries. Pioneers in this field were two Russian scientists. Both taught at Harvard University and received the Nobel Prize for their work. After the Bretton Woods Agreements of 1946, GDP, the calculation method of which was developed by Kuznets, became a standard measure of economic growth. A few years later, Vasily Leontyev published his matrix “Cost-Release”. It is on his developments that indicators are based that take into account the intermediate stages of the business cycle. However, it was easier to count GDP, so economic theory temporarily abandoned this, albeit more accurate indicator. The gross output of the enterprise was sometimes used only as an indicator at the micro level.
Today, there are several ways to measure economic growth. The most common is the calculation of GDP. His technique was developed by Simon Kuznets. However, it includes only final products. And this causes considerable discussion among economists. There are a number of similar methods for assessing growth. Recently, the UN SNA includes gross output, the merit of which is popularized by well-known investor Mark Skuzen. The main difference between the new indicator is the inclusion of intermediate consumption in the calculation.
