[Marxism] Concept of GDP, capital stocks, wealth estimates

Jurriaan Bendien andromeda246 at hetnet.nl
Mon Dec 13 14:59:31 MST 2004


In reply to questions by Charles:

Gross Domestic Product is a measure of the value of net output of resident
producing enterprises. It is defined as gross output (roughly, the value of
sales) less intermediate consumption (cost of goods & services used up to
produce new output).

Simultaneously, Gross Domestic Product is a measure of the new
income generated by production in a country. It is equal to the
sum of pre-tax labor-compensation, depreciation charges, pre-tax
distributed & undistributed profits plus indirect taxes reduced
by government subsidies to enterprises.

GDP is normally estimated for acccounting periods lasting a
quarter (three months) or a year, both for the
national economy and for different sectors. GDP includes the
net value of new additions to inventories during the
accounting period (the value of the change in the inventory
level, adjusted for price fluctuations).

One international standard for measuring GDP is
the UNSNA (UN System of National Accounts) but
in different countries methods often deviate somewhat
from the international standard

Very often, professional economists claim that GDP
equals "national income", but this is false. The main
reason is that GDP only includes income which
is considered to be generated from current production. Many
so-called "transfer payments", personal and household
receipts, or government revenues are excluded from
GDP. Therefore, true national income is normally
always larger than GDP.

In measuring world GDP, international agencies
add together the national GDP
figures for all countries, but these are adjusted for
purchasing power parity by some method ("ppp",
Atlas method, etc.). There exists no agreed or totally
accurate method for converting currencies to achieve
purchasing power parity, and therefore estimates of
world GDP by different agencies. The difference
between high and low estimates is about $4 trillion.

GDP does include the gross income of the finance,
real estate, insurance and business service enterprises,
but it excludes a portion of net interest receipts, basically
because these interest receipts are excluded from
gross revenue generated by production. In calculating
a total profit volume, the real profit receipts are
also reduced for definitional reasons. This does not
seriously affect the historical trend in the data much,
but it does change the interpretation of the distribution
of income.

By comparing GDP to corporate turnovers (sales volume)
we can obtain an indication of the relative size of
corporate activities. For example, "Business Week"
(July 26-August 2, 2004, o. 76) calculated that the total
assets of the Global top 1,000 corporations were $63.4
trillion and the total sales volume was $14.7 trillion
(as at May 31, 2004).

We know that world GDP in 2003 was about $36.1 trillion
(IMF estimate) so this means that the value of sales
by the 1,000 largest corporations equals about 40%
percent of world GDP. In reality, the contribution of
the 1,000 largest corporations to world GDP is a bit
smaller, because "total sales" is a gross output measure
from which we have to deduct goods and services
used up, to get a net output measure. But it is probably
correct to say that the value of net output of the largest
1,000 corporations equals somewhere near one-third of
the value of world GDP (I haven't done a more precise
calculation).

Yet this does not tell us much about the proportions
of tangible goods and services (use-values) being
produced, because unit costs and sale prices for
the same type of goods differs wildly between
different countries.

If you add quarterly GDP in the four quarters, then conceptually it should
equal annual GDP.

But often it does not add up. The reason is that quarterly figures are
typically estimated using mathematical models based on indicative
trends, and the estimates may be revised as more data becomes
available. Another reason is price inflation. In principle, "real
GDP" refers to GDP adjusted for inflation (converted to constant
dollars applying to a base year).

See:
http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp?SelectedTable=5&FirstYear=2002&LastYear=2004&Freq=Qtr

Statistical measures of economic quantities or financial transactions can be
either "stocks" or "flows".

A flow measure reflects expenditures or costs, or the value of transactions,
during an accounting period.
A stock measure reflects the value of an asset at a given point in time.
You can also compute an "average stock level" during a year, for example.
In the case of fixed capital stock, it is normally defined as capital tied
up in plant & machinery, land & buildings for a period of one year or
more.

The US NIPA system measures mainly physical stocks, for example, fixed
capital assets, housing, inventories, durable goods, and so on.
It is difficult to measure financial stocks very accurately, except by
looking at annual company reports of assets held at a balance date
or by looking at disaggregated tax data.

However, NIPAs do distinguish between financial and non-financial
corporations. It is useful to look at a corporate annual report to
see how the account is done. It will become clear then that
the value of the stock of financial assets is much larger
than the value of the stock of physical assets.

The aggregate "gross fixed capital formation" or "fixed investment" in
national accounts refers to the new additions to the stock of
fixed assets, the new fixed investment during
an accounting period, usually a year but sometimes half a year.
This includes investment in land improvements, but not
total land values.

Estimating fixed capital stocks is very complex, but basically, each year
there is new investment which adds to the stock, and
depreciation which reduces the value of the stock, plus, disposals of
obsolescent equipment.
http://www.bea.doc.gov/bea/dn/FA2004/SelectTable.asp

Fixed capital stocks are usually estimated either from the book
values cited by enterprises, or using a technique called the
Perpetual Inventory Method. Starting off from a benchmark stock, net
new investment is added year by year, while depreciation is deducted
year by year, all data being adjusted for inflation. Either known
depreciation charges are used, or depreciation assumptions are made
based on knowledge about asset lives.

Most scholars agree that fixed capital is difficult to measure very
accurately. But in modern business accounting practice, they try
as much as possible to value fixed assets at current market value
(what it would be worth, if you sold it now).
Fixed assets can be valued at historical cost (also known as acquisition
cost), replacement cost, or current market value.

Official US national Wealth estimates are provided here, on p. 50:
http://www.whitehouse.gov/omb/budget/fy2004/pdf/spec.pdf

However, this data does not refer much to financial wealth. Capital does not
have to be physical assets, it can also be financial assets. Capital does
not mainly consist of physical assets like plants and products, but of
financial claims - claims to assets and claims to labour. A fraction of
those claims refer to assets, income and labour which doesn't exist,
but which will exist in the future.

Data on financial assets is available e.g. from the Federal Reserve Board,
the Bank for International Settlements, etc.
http://www.bis.org/index.htm
http://www.federalreserve.gov/releases

The American expert on wealth and income data is Edward N. Wolff.
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=46052
He edits the Review of Income and Wealth:
http://www.blackwellpublishing.com/journal.asp?ref=0034-6586
http://www.ingentaconnect.com/content/bpl/roiw/2004/00000050/00000004;jsessionid=2gegiy16jodqn.henrietta
In this review, all the important measurement issues
concerning income & wealth are discussed.

The Unctad report on foreign direct investment:
http://www.unctad.org/Templates/Page.asp?intItemID=1465&lang=1

There are a very large number of sources for studying
financial markets and finance capital, but what is relevant
really depends on what question you're asking.

Jurriaan








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