GDP

Although I may not agree with everything he said, LY did give a concise and precise summary on the fiscal cliff and budget deficit of the US government. Alas, it’s not only for what my friend explained; there is something more fundamental that I find it difficult to understand: Why are everyone so worried about a decline in the Gross Domestic Product (GDP) (or, in the jargon of economists, recession)?

Let me explain. By the income approach (which I first read from Adam Smith), GDP of a country is the sum of rents, interests, profits, wages, and statistical adjustments (including corporate income tax, dividends, undistributed corporate profits, and so forth). The absolute value of most of these items (i.e. take aside the effect of inflation) reflect the productivity of a country and its people, and should be relatively constant unless there’s something fundamental changed in the country (for example, the discovery of North Sea Oil by the Great Britain). Two of the items (namely, interests and profits) are specifically affected by interest rate and may change in either way.

There is, in other words, little reason to believe in, or to insist on, an unlimited continual increase in the GDP of a country – unless you agree with certain nuclear physicist from the crooked universe.