This is really embarrassing. It turns out that my argument about investment leading to an increase in GDP comes from a simple ignorance of mathematics. Navin clearly points this out for me.
1. GDP = consumption + investment + exports – imports
This clearly shows a GDP can grow even without investments when other factors help. Currently, America’s savings rate is below 0% (hence no investments as per ravi), so the GDP growth is also not there ? Indeed, its there,a good 3.3% !! This example makes it clear that ravi’s statement is a bit off ( I wouldn’t say wrong. That would be rude ;-))
How silly of me to forget this equation! As you can clearly see, raising investment on the Right Hand Side will of course raise the GDP on the Left Hand Side, but the same can be achieved by increasing consumption! So all that I have to do is to increase the consumption and GDP increases! So it was just silly of me not to know of this basic mathematical fact. So to put it very simply, if I consume 1 pane of glass for my window this year, I just need to place another order for 1.5 panes of glass for my bigger window next year, and hey presto! the GDP will grow by (0.5 panes)* (price of 0.5 panes of glass).
Just one question. Where will that extra half a pane of glass come from?
Hmm. Maybe “Demand creates its own Supply?” Isn’t this Keynesian economics?
I think the confusion is in part the issue of what constitutes savings. Obviously you cannot grow an economy without investment, but investment money can come from many sources. One of the primary sources would be reinvested profits from industry. Another might be borrowing which could originate anywhere, even overseas. So even if the locals don’t put any of their own money in a savings account, (and who does anymore?) then the economy can still grow.
Ravi,
I thought the previous reasoning was logical except for the choice of words.
My assumption is that, you were trying to imply the “purchasing power” goes down when there is an added cost associated with a basic consumer product. That would mean an overall decrease in demand.
Am not sure if am putting this right. But my point is – the situation is analogous to a sharp rise in inflation (I know, not same, but surely analogous)
P.S : I did not check this for typos 😉
For a second I thought you were serious. The basic problem, of course, is GDP includes “unproductive production”. Have too much of this, it will impair GDP growth over years.
Broken windows and stabilizers are just two items in the list. We have the big government machinery – bureaucrats, traffic policemen etc etc. My office in Chennai is not far from Raj Bhavan. Once in a while, all of us here get to hear the sound his fleet of cars makes as he passes by. But, does anyone know what a governer does??? Surely, the amount spent on his cars and his people add to the GDP. (btw, the equation doesn’t mention G!)
How does it affect GDP growth? Take two households with equal income – and this year, imagine, one spends much of it in throwing a lavish party (presumably unproductive) and the other spends the same amount in education (productive). This year, ‘GDP’ of both the households are same. But what about the future? What’s good for a household often holds good for the country as a whole.
But then, you really cant expect GDP to confess reality, howmuchever you torture it. It’s afterall just a number. A couple of days back, Chennai had a great temperature 26`c, but it was of no help to many who were trying hard to push their vehicles, standing knee deep in water, getting drenched. And then, there is this guy whose weight is 70 kgs. Good weight for an average Indian, all right. But he is only 3 feet tall. Compared to these, GDP comes out okay as an indicator.
Hi, I didnt mean to post an anonymous comment. (I couldnt add my name etc. in the post above)
Anyway, I found this piece in ToI yesterday. Similar thoughts, but Sauvik Chakraverti has even a better term for ‘unproductive production’. He calls it “misproductive work”. Sounds better.
a correct estimation of GDP should be C + I – G + Imports – Exports. Imports should be ADDED because they add to our concumtion and are more valued than exports, because they are what we cannot make ourselves. Government should be subtracted, as it is “misproductive”. In fact, there is a “negative multiplier” with increasing G, because more babus are employed to loot us even more! So there’s Keynesianism for you!