Fascinating -- thanks for the clarification, Ed. I am still perplexed by the assertion, then, that NIPA does not take profit statements from corporations in its calculation. If 'profit' is part of the GNP calculation, how is it tabulated, if not from corporate Statements?
But your central point is the important one: what if some of the transactions that are included in GNP are 'wasteful' -- that is, do not contribute to the economic well-being of the society. E.g., if a company cuts corners and leaves a manufacuring site badly polluted (thus increasing its profit-reporting (presumably) and thus increasing that portion of the GNP, and then the EPA must come along and spend money from Superfund to clean it up (thus contributing wages and capital materials/equipment expenditures to the GNP calculation), do we not have actions that are in fact off-setting (pollute, then unpollute), though the GNP would show an increase from both. I can imagine an economy that shows much activity in its GNP, but the net benefit of all its activity much less than the numbers would suggest. Of course, people can get into great arguments about what contributes value, and what merely offsets another transaction, and what transactions might actually constitute a net loss of value, that is, money is spent in such a way that it devalues society. And then, of course, this could be taken down to the level of individual jobs. Lawry > -----Original Message----- > From: Ed Weick [mailto:[EMAIL PROTECTED]] > Sent: Thursday, July 11, 2002 10:56 AM > To: Lawrence H. de Bivort; Keith Hudson; [EMAIL PROTECTED] > Subject: Re: Porkie Pies > > > > > Hmmmm....wouldn't NIPA measure transactions, rather than profits? There > may > > be an assumed relationship, that is, as transactions grow, so 'should' > > profits,' but the GDP or GNPs are not measures, if I remember > correctly of > > profits, but of the volume of financial transactions that have taken > place, > > regardless of whether they resulted in a profit. > > > > Lawry > > This has sent me back to my textbooks. According to > "Macroeconomic Theory" > by Gardner Ackley: > "national income is the sum of all (a) wages, salaries, commissions, > bonuses, and other forms of employee earnings (before deduction > of taxes or > social security contributions); (b) net income from rentals and > roy-alties; > (c) interest income; and (d) profits, whether of a corporation, > partnership, > or proprietorship, whether paid out to owners or retained in the business, > and before deduction of taxes based on income." > > This suggests that overstated profits such as those of Enron and Worldcom > would be included in national income (NI). They would also, according to > Ackley, find their way into GNP, since GNP is equivalent to > national income > plus depreciation. GNP minus depreciation is also equivalent to net > national product (NNP) which is equivalent to NI. > > In national accounting, income and product may simply be thought of as > opposite sides of the coin. Income, as above, is the sum of all incomes > including profits. Product is the value of all transactions at market > prices, which would also include profits. Again, this suggests that > overvalued profit income or CEO perks, and goods and services which are > overpriced because they include excessive profits or overvalued > perks, would > find their way into the national accounts and hence GNP. > > Given the foregoing, I'd conclude that the GNP of the US (and other > countries which have indulged in the .com bubble) may well be overstated. > The important question is by how much. > > Ed Weick > > > > > > > As it seems to be economist-bashing time on Futurework I can't resist > > > passing on an amusing item from today's 'Times' which I read on my > dogwalk > > > this morning (during which my dog stole another dog's ball and > > > destroyed it > > > in one bite which caused protracted and exceedingly diplomatic > > > negotiations > > > with the other dog's owner) before I turn to the sordid business > > > of earning > > > a few pennies. > > > > > > <<<< > > > NO FICTITIOUS PROFITS AT UNCLE SAM INC > > > Chris Ayres > > > > > > An economic conundrum is keeping me awake at night. It is this: surely > if > > > WorldCom overstated its profits by US$3.8 billion and Merck reported > US$14 > > > billion of "phantom" revenues, then the Gross Domestic Product > > > (GDP) of the > > > United States must be wildly inaccurate. > > > > > > In fact, if as many firms have been fiddling their books as > we have been > > > led to believe, logic would suggest that the US will have to re-state > its > > > own financial results -- that is, its GDP -- for, oh, the past > > > ten years or > > > so. > > > > > > Imagine the Press Release: "Following an internal audit, Uncle Sam has > > > discovered accounting irregularities regarding the sale of > approximately > > > $10 trillion of computer equipment during the past decade. > All relevant > > > authorities have been informed." > > > > > > President Bush would be forced to send himself to jail -- and > then, in a > > > populist move to please voters in Texas, double his sentence. > > > > > > This theory gripped me with such force that I took radical > > > action: I called > > > an economist. The dismal scientist in question was Ken Goldstein, > > > who works > > > for the Conference Board, the economic research company behind the > > > oft-cited Consumer Confidence Index. > > > > > > Goldstein informed me that my theory is both unoriginal and > > > entirely wrong. > > > The eggheads who compile GDP figures, he says, do not use > data issued by > > > corporations. > > > > > > Instead, they use something called National Income and Product Account > > > (NIPA). This method of calculating the profits made by US > firms without > > > relying on their published financial reports was invented in the 1930s > by > > > the late Simon Kuznets. NIPA is so ingenious that Kuznets won a Nobel > > > Prize for it. > > > > > > But hang on a minute. If NIPA is so foolproof and accurate, > then someone > > > must have spotted a sufdden and inexplicable difference between its > > > quarterly growth rate and the growth rate of the fictitious profits > > > reported by the likes of Enron amd WorldCom. At this point, > > > Goldstein coughs. > > > > > > Well, yes, he replies. As it turns out, the growth rate of NIPA and > > > Standard & Poor's 500 profits tracked each other for years, > but suddenly > > > began to contradict each other in 1998, the year the boom became a > bubble. > > > In that year, NIPA figures said corporate after-tax profits > had plunged > > > 7.5%. But according to the figures released by S&P's 500 > > > companies, profits > > > had increased by an impressive 3.7%. > > > > > > Clearly someone was telling porkie pies*. At the time, > amazingly, it was > > > the Nobel Prizewinner's figures that were questioned, not the > S&P 500's. > > > > > > But what did the economists do about it? In the end, nothing. "It was > > > staring us in the face," admits a sombre Goldstein. So forget Arthur > > > Andersen. It was the economists wot done it. > > > >>>> > > > > > > *Just in case an FWer doesn't understand this term, this is > the Cockney > > > (London) rhyming slang for "lies". There are thousands of them. e.g.: > > > Aristotle -- bottle; Crown Jewels -- tools; Flowery Dell -- cell > (prison); > > > Fork and Knife -- wife; Forrest (Gump) -- dump; Four-wheeler (car, > > > automobile) -- Sheila; Apple Tart -- fart. Got it? M'mm . . . all this > is > > > displacement activity -- I must now get on with some work.) > > > ------------------------------------------------------------------ > > > ---------- > > > ------------ > > > > > > Keith Hudson, General Editor, Handlo Music, http://www.handlo.com > > > 6 Upper Camden Place, Bath BA1 5HX, England > > > Tel: +44 1225 312622; Fax: +44 1225 447727; mailto:[EMAIL PROTECTED] > > > > ________________________________________________________________________ > > > > > > >
