Gross Domestic Product Leaves out $21 Trillion in Business Spending

Posted: Dec 30, 2015 12:01 AM
Gross Domestic Product Leaves out $21 Trillion in Business Spending

Yahoo Finance reported a revised Gross Domestic Product (GDP) recently for the third quarter of 2015, emphasizing consumer spending as the driving force of the economy because it “accounts for more than two-thirds of U.S. economic activity.” Like a bad penny, this myth of consumer spending returns regularly.

Yahoo Finance stated, “Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.0 percent rate in third-quarter 2015 as previously estimated. Savings, which are near three-year highs, and low inflation are also helping to underpin consumption.”

The source of this error is the steadfast belief, reinforced in economics textbooks, that GDP is a measure of “total economic activity.” In fact, GDP measures only the value of final output and leaves out all the intermediate production processes and supply chains that produce the final product.

Amazingly, GDP leaves out some $21 trillion in business-to-business spending (B2B) in the economy (economic activity). Read further details.

When you leave out most B2B spending in measuring “total U.S. economic activity,” you can see why consumer spending, rather than business spending, is suddenly the most important driver of the economy. But when you include B2B, as Gross Output (GO) does, you come to the very opposite conclusion that business spending drives the economy — which fits our understanding of economic growth much better.

Gross Output measures sales or receipts of all industries throughout the production process, including business to business transactions. As a result, GO provides a fuller perspective .of the performance of the broad U.S. economy, in contrast to GDP.

I first introduced Gross Output as a macroeconomic tool in my book, “The Structure of Production,” (New York University Press, 1990). The U.S. Bureau of Economic Analysis now publishes GO on a quarterly basis in its “GDP by Industry” data.

Economic growth derives from the supply side of the economy – productivity, savings, investment capital, and entrepreneurship. Consumer spending is the effect, not the cause, of prosperity. Say’s Law lives!