Compendium: Economic Growth/Contraction: GDP Rate

The following entry for the Compendium is one of various different examples where mathematics will be employed to arrive at conclusions. Nothing too difficult insofar as every calculation relies on a basic understanding of simple arithmetic. This applies for both the conventional Liberal Capitalist equations and those intended for the Work-Standard. Separate entries will be devoted to the Liberal Capitalist version as well for the Work-Standard.  

It is fairly common within Liberal Capitalist economic discourse to speak or hear of “economic growth” and “economic contraction.” To those unfamiliar, these terms are used in reference to the performance of any given Market and Mixed Economies in relation to their “size.” When their economists wish to speak of their “size,” they will be relying on a technical basis by which to articulate their judgements on overall performance. The system by which to make any judgements in general is known as the “Gross Domestic Product” (GDP).

A nation-state’s “GDP Rate” is the value of all economic activity. An arithmetic equation is employed in order to determine the total based on given data. That equation is written as the following:    

Consumption (C) + Investments (I) + Government Spending (G) + (Exports – Imports) [X – M]

GDP = C + I + G + (X – M)

“Consumption” refers to the total expenditures of the nation-state in terms of “consumer spending.” “Investments” refers to the amount of Kapital allocated to the economy by privatized commercial firms. “Government Spending” is the expenditures by the government as part of the economy. And “Exports” and “Imports” are the totals for goods and services associated with the nation-state’s trading policies.

As one can tell from the equation, the GDP Rate is determined by the total expenditures rather than what the economy is actually doing. When Liberal Capitalists wish to delve into more technical details, I should point out that this is only one of the methods employed by them. Since the above equation is only a basic indicator, there are three different methods of calculating the GDP Rate: Income, Expenditure, and Output.

The Expenditure equation reads as follows. Note that this is basically the same equation as the one I demonstrated earlier:

GDP = C + I + G + (X – M)

Here is the Income equation:

GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

And here is the Output equation:

GDP = Gross Value of Output – Value of Immediate Consumption

The Income equation is intended for calculating the sum amount of Kapital that the nation-state earns. The Output equation is the total amount of Kapital in produced goods and services minus the amount of Kapital in the consumption of those same goods and services. Regardless of the method chosen, all three should have the same value for each method.

GDP = Income Method = Expenditure Method = Output Method

It is inevitable for the Inflation/Deflation Rate to distort the value of any given figures intended for calculating the GDP Rate. This in turn justifies the need for a “Nominal GDP Rate,” taking into account only the price increases that affect the final total of any GDP Rate. Of the three GDP equations, the Expenditure Method is best suited for that endeavor.

Finding the GDP Rate without taking into account the Inflation/Deflation Rate is known as the “Real GDP Rate.” But unlike the Nominal GDP Rate, the Real GDP Rate relies on its own equation, as demonstrated below:

Real GDP = Nominal GDP/GDP Deflator

The “GDP Deflator” is for measuring the changes in prices according to the Nominal GDP. With it, economists can determine the rate at which prices fluctuated across given years.

GDP Deflator = (Nominal GDP / Real GDP) * 100

By discerning the changes in prices, conclusions could be made about the Real GDP Rate.

However, as stated earlier, the Work-Standard relies on its own equations for determining the total value of economic activity. The justification for this is two-fold.

First, the Expenditure Method, used for finding the Nominal GDP Rate and by extension the Real GDP Rate, is dependent on the idea that there is a “private sector” and a “public sector” in the economic activities of the nation-state, regardless of the former’s national origin. This implies that the economy in question must be either a Market Economy or a Mixed Economy. And second, the Income Method is unreliable for the Work-Standard because it rejects the notion of taxation and the concept of Kapital overall. That too is also tied to the first justification. Both prevent the GDP Rate from being effective for the Work-Standard since all three Methods have to be equal to each other in order to obtain the GDP Rate.



Categories: Compendium

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