GDP Question (Hopefully, mainly non-political)

[Spock]

It is commonly mentioned that 65 to 70 percent of the economy is consumer spending. What is the remainder?

I think I kind of get that most business spending gets counted eventually in consumer spending.

I am in the process (about 3 years) of spending beaucoup dollars on refurbishing my hog barns. The renters basically said-"Do it, or we leave."

This expenditure will not be reflected in consumer spending because the same amount of pigs will come through the system. One could argue that the expenditure will allow continued consumer spending by continuing the same amount of pigs.

The money will go to contractors, electricians, etc for labor and equipment.

I don't think this falls under Bastiat's Broken Window.
http://bastiat.org/en/twisatwins.html

The remodeling is seen, and the other things that I would have spent it on is unseen. However, the barns are 20 years old, so this expenditure is natural.

Is it counted in GDP? As business to business spending? Or is the expenditure reflected in consumer spending for bacon/ham/etc.

[Bob78164]

It is commonly mentioned that 65 to 70 percent of the economy is consumer spending. What is the remainder?

I think I kind of get that most business spending gets counted eventually in consumer spending.

I am in the process (about 3 years) of spending beaucoup dollars on refurbishing my hog barns. The renters basically said-"Do it, or we leave."

This expenditure will not be reflected in consumer spending because the same amount of pigs will come through the system. One could argue that the expenditure will allow continued consumer spending by continuing the same amount of pigs.

The money will go to contractors, electricians, etc for labor and equipment.

I don't think this falls under Bastiat's Broken Window.
http://bastiat.org/en/twisatwins.html

The remodeling is seen, and the other things that I would have spent it on is unseen. However, the barns are 20 years old, so this expenditure is natural.

Is it counted in GDP? As business to business spending? Or is the expenditure reflected in consumer spending for bacon/ham/etc.

I think the answer is that it gets counted as business spending. Then the contractors, electricians, etc. will spend their earnings and it will be counted at that point as well. --Bob

[Spock]

>>>I think the answer is that it gets counted as business spending. Then the contractors, electricians, etc. will spend their earnings and it will be counted at that point <<<

Maybe a better example. I just sold some cattle today. 100% of that will be reflected in consumer spending-either steaks, etc or as exports-which will presumably be counted in GDP.

I have had various costs involved in raising them (feed, fencing supplies etc)-all of those costs should be reflected in consumer spending/exports.

Is there any point where my expenditures/receipts fit into GDP? Yes, I will be having consumer spending from my check-so does any of my spending to participants count as Business to Business or is it reflected as Consumer spending?

Simply put, I think I am trying to get a handle on what the business spending portion of GDP is.

I do a lot of business spending-but I am confused on where that fits into GDP counting.

[Bob78164]

>>>I think the answer is that it gets counted as business spending. Then the contractors, electricians, etc. will spend their earnings and it will be counted at that point <<<

Maybe a better example. I just sold some cattle today. 100% of that will be reflected in consumer spending-either steaks, etc or as exports-which will presumably be counted in GDP.

I have had various costs involved in raising them (feed, fencing supplies etc)-all of those costs should be reflected in consumer spending/exports.

Is there any point where my expenditures/receipts fit into GDP? Yes, I will be having consumer spending from my check-so does any of my spending to participants count as Business to Business or is it reflected as Consumer spending?

Simply put, I think I am trying to get a handle on what the business spending portion of GDP is.

I do a lot of business spending-but I am confused on where that fits into GDP counting.

Your assumption is mistaken. The money spent by your immediate purchasers won't be consumer spending. The money spent at the butcher is what falls into consumer spending. Your costs are business spending, not consumer spending. All of this falls into GDP. --Bob

[Spock]

>>>I think the answer is that it gets counted as business spending. Then the contractors, electricians, etc. will spend their earnings and it will be counted at that point <<<

Maybe a better example. I just sold some cattle today. 100% of that will be reflected in consumer spending-either steaks, etc or as exports-which will presumably be counted in GDP.

I have had various costs involved in raising them (feed, fencing supplies etc)-all of those costs should be reflected in consumer spending/exports.

Is there any point where my expenditures/receipts fit into GDP? Yes, I will be having consumer spending from my check-so does any of my spending to participants count as Business to Business or is it reflected as Consumer spending?

Simply put, I think I am trying to get a handle on what the business spending portion of GDP is.

I do a lot of business spending-but I am confused on where that fits into GDP counting.

Your assumption is mistaken. The money spent by your immediate purchasers won't be consumer spending. The money spent at the butcher is what falls into consumer spending. Your costs are business spending, not consumer spending. All of this falls into GDP. --Bob

The problem I have is that if you counted every business to business transaction along the way-The business spending would exponentially dwarf the consumer spending to get that steak to market. My basic premise/understanding is that the consumer buys the steak and that accounts(GDP-wise) for almost all the costs associated with getting that steak to market. There are various profits along the way-which go into investment and consumer and thus come into play there.

My cattle example today.

I hauled 8 cattle today to the Fergus Falls Livestock auction(FFLA). They were auctioned off to packer buyers for $15,475.59. I got a check from FFLA for $15,330.62. They kept a commission of $144.97.

FFLA got a check from the packer buyers for $15,475.59. There were a lot of business to business transactions today-but I would argue that the only possible GDP contributor was the $144.97. However, I think that all of this is accounted(GDP-wise) when the consumer buys his steak.

Otherwise, with all the steps and transactions involved in even the production of a box of corn flakes-the business side would exponentially dwarf consumer spending.

I do think that my barn refurbishing is counted in GDP, but not the bag of feed that I picked up this morning-that would be accounted in the consumer purchase of the steak.

[Bob Juch]

>>>I think the answer is that it gets counted as business spending. Then the contractors, electricians, etc. will spend their earnings and it will be counted at that point <<<

Maybe a better example. I just sold some cattle today. 100% of that will be reflected in consumer spending-either steaks, etc or as exports-which will presumably be counted in GDP.

I have had various costs involved in raising them (feed, fencing supplies etc)-all of those costs should be reflected in consumer spending/exports.

Is there any point where my expenditures/receipts fit into GDP? Yes, I will be having consumer spending from my check-so does any of my spending to participants count as Business to Business or is it reflected as Consumer spending?

Simply put, I think I am trying to get a handle on what the business spending portion of GDP is.

I do a lot of business spending-but I am confused on where that fits into GDP counting.

Your assumption is mistaken. The money spent by your immediate purchasers won't be consumer spending. The money spent at the butcher is what falls into consumer spending. Your costs are business spending, not consumer spending. All of this falls into GDP. --Bob

The problem I have is that if you counted every business to business transaction along the way-The business spending would exponentially dwarf the consumer spending to get that steak to market. My basic premise/understanding is that the consumer buys the steak and that accounts(GDP-wise) for almost all the costs associated with getting that steak to market. There are various profits along the way-which go into investment and consumer and thus come into play there.

My cattle example today.

I hauled 8 cattle today to the Fergus Falls Livestock auction(FFLA). They were auctioned off to packer buyers for $15,475.59. I got a check from FFLA for $15,330.62. They kept a commission of $144.97.

FFLA got a check from the packer buyers for $15,475.59. There were a lot of business to business transactions today-but I would argue that the only possible GDP contributor was the $144.97. However, I think that all of this is accounted(GDP-wise) when the consumer buys his steak.

Otherwise, with all the steps and transactions involved in even the production of a box of corn flakes-the business side would exponentially dwarf consumer spending.

I do think that my barn refurbishing is counted in GDP, but not the bag of feed that I picked up this morning-that would be accounted in the consumer purchase of the steak.

Almost $2000 a head? Damn!

[Spock]

Your assumption is mistaken. The money spent by your immediate purchasers won't be consumer spending. The money spent at the butcher is what falls into consumer spending. Your costs are business spending, not consumer spending. All of this falls into GDP. --Bob

The problem I have is that if you counted every business to business transaction along the way-The business spending would exponentially dwarf the consumer spending to get that steak to market. My basic premise/understanding is that the consumer buys the steak and that accounts(GDP-wise) for almost all the costs associated with getting that steak to market. There are various profits along the way-which go into investment and consumer and thus come into play there.

My cattle example today.

I hauled 8 cattle today to the Fergus Falls Livestock auction(FFLA). They were auctioned off to packer buyers for $15,475.59. I got a check from FFLA for $15,330.62. They kept a commission of $144.97.

FFLA got a check from the packer buyers for $15,475.59. There were a lot of business to business transactions today-but I would argue that the only possible GDP contributor was the $144.97. However, I think that all of this is accounted(GDP-wise) when the consumer buys his steak.

Otherwise, with all the steps and transactions involved in even the production of a box of corn flakes-the business side would exponentially dwarf consumer spending.

I do think that my barn refurbishing is counted in GDP, but not the bag of feed that I picked up this morning-that would be accounted in the consumer purchase of the steak.

Almost $2000 a head? Damn!

Exactly-Lifetime high. I got about $1.50 a pound. 8 head ahead of me weighed about 1,450 pounds and got $1.60 per pound(they were naturals) anyway over $2300 a head. I have never seen anything like it.

[Bob Juch]

The problem I have is that if you counted every business to business transaction along the way-The business spending would exponentially dwarf the consumer spending to get that steak to market. My basic premise/understanding is that the consumer buys the steak and that accounts(GDP-wise) for almost all the costs associated with getting that steak to market. There are various profits along the way-which go into investment and consumer and thus come into play there.

My cattle example today.

I hauled 8 cattle today to the Fergus Falls Livestock auction(FFLA). They were auctioned off to packer buyers for $15,475.59. I got a check from FFLA for $15,330.62. They kept a commission of $144.97.

FFLA got a check from the packer buyers for $15,475.59. There were a lot of business to business transactions today-but I would argue that the only possible GDP contributor was the $144.97. However, I think that all of this is accounted(GDP-wise) when the consumer buys his steak.

Otherwise, with all the steps and transactions involved in even the production of a box of corn flakes-the business side would exponentially dwarf consumer spending.

I do think that my barn refurbishing is counted in GDP, but not the bag of feed that I picked up this morning-that would be accounted in the consumer purchase of the steak.

Almost $2000 a head? Damn!

Exactly-Lifetime high. I got about $1.50 a pound. 8 head ahead of me weighed about 1,450 pounds and got $1.60 per pound(they were naturals) anyway over $2300 a head. I have never seen anything like it.

I guess I'll be generating a lot of consumer spending when I buy beef this winter.

[Bob78164]

The problem I have is that if you counted every business to business transaction along the way, the business spending would exponentially dwarf the consumer spending to get that steak to market.

I may be wrong but I don't think that can be right. The cumulative price the steaks command at market has to exceed the cumulative price to raise the cattle and get the steaks to market in the first place. Otherwise someone in the supply chain is taking a loss. --Bob

[BackInTex]

The problem I have is that if you counted every business to business transaction along the way, the business spending would exponentially dwarf the consumer spending to get that steak to market.

I may be wrong but I don't think that can be right. The cumulative price the steaks command at market has to exceed the cumulative price to raise the cattle and get the steaks to market in the first place. Otherwise someone in the supply chain is taking a loss. --Bob

Bob, you are only considering the added value. Spock was talking about cumulative, so costs at each step are included in all subsequent steps. Its an inaccurate view, and I think why Spock is questioning that method.

Cost to buy young steer: $200 (breeder gets $200)
Cost to feedlot for grown steer: $1200 (rancher gest $1200, but paid $200, so the $200 is now doubled as the total of the transactions is $1400)
Cost to meat market: $1500 (feedlot makes $100 but now the cumulative price (not cost) is $2900.... and so on.

I myself do not know how the GDP is determined.

[silverscreenselect]

The problem I have is that if you counted every business to business transaction along the way, the business spending would exponentially dwarf the consumer spending to get that steak to market.

I may be wrong but I don't think that can be right. The cumulative price the steaks command at market has to exceed the cumulative price to raise the cattle and get the steaks to market in the first place. Otherwise someone in the supply chain is taking a loss. --Bob

There are two methods of calculating GDP. Under the expenditure method, which you are referring to here, there are four components: consumer spending (on final goods and services), investment, government spending, and exports. However, "investment" does not mean what we normally think of.

If I buy a share of stock, that is not an investment under this method. I am exchanging one asset (cash) for another asset (ownership in a company). It's only after I sell the stock and receive (hopefully) additional cash and then spend that cash that I contribute to the GDP.

Instead, investments are business expenditures that aren't part of an exchange of assets. The money you spent on the farm does not contribute directly to the value of your cow, so it's an investment. Similarly, the money you spend on the machinery at your farm doesn't contribute directly to the value of your cow. They are part of the GDP. On the other hand, the feed and medical supplies you spend on that cow and the price you paid to transport the cow to market do not contribute to the GDP; they become part of the cow that you eventually exchange, in much the same way that every nut and bolt a manufacturer puts into its finished product becomes a part of that product

You receive back the money you invested in the farm indirectly. When you sell your cow at a profit over the various direct costs, that profit reflects in part a return on your investment and in part the value of your labor. If, instead of working the farm yourself, you hired someone to do it, his salary would be an investment by you, and, in that case, the entire profit you made when you sold the cow would be the return on your investment.

So, you're right that "business spending" per se dwarves consumer spending. However, much business spending does not contribute directly to the GDP.

[Estonut]

So, you're right that "business spending" per se dwarves consumer spending. However, much business spending does not contribute directly to the GDP.

What do little people have to do with this?

[Spock]

>>>So, you're right that "business spending" per se dwarves consumer spending. However, much business spending does not contribute directly to the GDP.<<<

Exactly, in a roundabout way we kind of got back to my original question which probably was not stated well. Given that most steps are accounted GDP wise in the consumer spending dollar-what business spending is included in GDP?

[silverscreenselect]

>>>So, you're right that "business spending" per se dwarves consumer spending. However, much business spending does not contribute directly to the GDP.<<<

Exactly, in a roundabout way we kind of got back to my original question which probably was not stated well. Given that most steps are accounted GDP wise in the consumer spending dollar-what business spending is included in GDP?

Business spending that is not tied to the production of a particular product or service (essentially, indirect costs) is considered investment and is one of the four components of GDP, along with consumer spending, government spending, and net exports. Consumer new home purchases are also considered investment for this purpose.

The price you pay for the farm and farm equipment, advertising and marketing costs (if you have any) are investments. If you operate the farm profitably, you receive a return on your investment based on the difference between what you spend for your cattle and what you sell them for. On the other hand, what you spend that goes into the "finished product," in your case the cow, are not considered investments. If you paid $500 for the cow and another $500 for feed for that cow and $100 for medical expenses on that cow, and $50 to transport that cow to market, then none of that would be part of the GDP.

[Spock]

That makes sense.

Obviously, the refurbishing of the barns falls under investment, and thus into GDP.