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The Misleading Concept Called GDP

  • Gross Domestic Product(ion) is (or has become) a measurement of activity and consumption, but not of capital accumulation and production.
  • In many cases, GDP is negatively correlated to savings. Higher savings (aka austerity) lead to lower GDP growth today, but higher GDP in the future.
  • In its worst case, GDP growth could be completely based on credit, eliminating the capital basis of a country (example Greece)..
  • Western countries saw rising housing investments based on more credit. These investments, however, do not lead to increased production, while the credit may destroy the capital base.

Bawerk, a pseudonym writer based on the Austrian economist Eugen Böhm von Bawerk stipulates that:

GDP = Gross Domestic Product (or Production) in Western countries has become Gross Domestic Consumption = GDC  hence mostly consumption or consumption-driven activity.

GDC is exercised today and not in the future, meaning it is not saved. When it is based on credit, then GDC growth is in certain cases equivalent to capital absorption (example Greece).

Higher GDC often implies lower savings and lower consumption in the future. These movements of the savings rate, often incited by monetary expansion and easy credit, lead to boom and bust cycles. GDC-driven growth happens when people prefer consumption today and not in the future.

  • GDP is (or has become) a measurement of activity and consumption, but not of capital accumulation and production.
  • In many cases, GDP is negatively correlated to savings. Higher savings (aka austerity) lead to lower GDP growth today, but higher GDP in the future. The formerly sick man of Europe, Germany, is the best example.
  • In its worst case, GDP growth could be completely based on credit, eliminating the capital basis of a country (example Greece).
  • Western countries saw rising housing investments based on more credit. These investments, however, do not lead to increased production, while the credit destroys the capital base.
  • China, on the side, is building a strong future based on high savings, capital accumulation and high investments, (even if the credit and housing investments part is increasing in parallel).




The Europeans tried austerity, the act of reducing budget deficits, and they did not like it. It was no fun, so they decided to focus on growth instead. We have no idea what that means, but apparently they believe they can go back to the heydays when consumption had nothing to do with actual production.

For example, the Greeks ran a massive goods deficit with the rest of the world (and they still do). At the peak this amounted to a staggering sum of 48 billion euros. At the time that meant almost 12 thousand euros per Greek worker, which corresponds roughly to what he made on a netbasis that year! In other words, the Greek worker got 12 thousand euros from his employer which he spent on consumption and simultaneously consumed an additional 12 thousand through indebting himself to foreigners. According to the Organization of Economic Co-operation and Development (OECD) saving rates in Greece, as per cent of disposable income, is deeply negative and has been for many years. In other words, the Greek society has consumed far more than they themselves produced of value. This is not unique to the western world; on the contrary, most western countries have consumed more than they have produced for quite some time.

greek gdp consumption

Click to enlarge.

Knowing a thing or two about capital theory we would expect output in these economies to nosedive over the same period. Production comes out of capital accumulation and if society regresses through capital decumulation it follows logically that output must fall. However, if we look at consumption and GDP in Greece since 2000 we find a positive correlation! And even more striking, the correlation between savings and GDP is negative! Everything we have ever learnt about personal finance, building a business or capital theory seems lopsided! According to the data it is the exact opposite! The more you consume and the less you save the more you grow your economy!
To make matters even more obscure, we can also find a positive correlation between government expenditure and output. If the government spends more money output increases and visa verse. No wonder the Europeans found austerity boring. Only an evil person (or an environmentalist) would advocate austerity when faced with such “proof”.In order to answer this apparent conundrum we need to ask ourselves what GDP actually measure? In “Taking the Pulse on the Economy: Measuring GDP” by Landefeldet al. we learn that “the method [to calculate GDP] produces consistent estimates of the value of final sales to consumers…” in addition one has to add “government expenditures on goods and services”. This is what economists call final demand, or expenditure, approach. In other words, gross domestic production is derived primarily from household and government consumption. We say primarily, because statistical bureaus do adjust for net exports and government transfer payments. However, as per cent of the total these are relatively small.

The Bawerk.net reader will immediately understand why we consistently call GDP forgross domestic consumption, or GDC. It does not measure production at all, but rather consumption. And due to today`s perverted credit system the two can be completely decoupled both for individuals and nations!

greece outlays spending

Click to enlarge.

Historically the so-called GDP concept were made out of the Keynesian worldview expressed in the infamous tautological equation Y = C + I + G + X where output (Y) equals consumption adjusted for net export.
Through a complete obfuscation of the terms and expression now used in our daily conversation about economics we often hear utter nonsense such as the US economy is driven by household consumption. In sheer ignorance one can even hear self-proclaimed experts; banksters and pundits state that 70 per cent of the US economy is household consumption. If that were true, we would see the following development in the US of A:
Greece GDC as Monetary Concept
The simple fact that we do not see this should be enough to discredit the whole notion of GDP and we recommend everyone to start call it what it really is; gross domestic consumption, or GDC. Only by doing so can we once again have a meaningful conversation about economics in general and austerity in particular. Yes, if you reduce consumption, then measured consumption as expressed by GDC will also fall. Conversely, if you lower your saving rate GDC will increase.
However, there is an entirely different way of thinking about GDC. We have established that GDC measures aggregate demand. We also know that aggregate demand (AD) can be expressed in currency units. In other words, GDC = AD = M2*Velocity. We also know that M2 = monetary base * multiplier. Substituting for AD, we can say that GDC = Velocity * (Monetary base * multiplier). In this sense we can deconstruct the GDC for every nation with available statistics as pure monetary phenomena. The next chart shows US GDC as reported by the Bureau of Economic Analysis (BEA) and broken down to its logical monetary constructs.

gdc monetary

Click to enlarge.

Suddenly it becomes obvious how destructive programs such as quantitative easing (QE), which allocate resources directly into the ominous 1 per centers pockets, can actually lift GDC. At this point the reader might ask if the price deflator used to calculate a real GDC number will compensate for the effect from QE-programs.
We test for that by deflating GDC with various price gauges, such as the official BEA GDC deflator, the BLS CPI, the Billion Prices Project (only from 2008) and ShadowStat`s constant CPI methodology to see what have happened with real GDC. Interestingly enough, the BEA deflator that is actually used to derive the real GDC number is the most lenient. Even using the CPI we get consistently lower GDC growth. If we were to use Mr. Williams’s constant CPI methodology concept we see how detrimental overconsumption can be to actual wealth creation to the extent GDC measures wealth.

gdc deflator

Click to enlarge.


The concept we call gross domestic product(ion) is highly distortive. In obfuscate intelligent debate in economics as the true underlying force for economic growth, capital accumulation, is seen as detrimental to prosperity.


Even mainstream economists prove that a concentration on property investments weakens export performance and productivity.
VoxEU: Balazs, Kierzenkowski: Exports and property prices: Are they connected?

VoxEU: Charkraborty, Gioldstein, MacKinlay: Dark side of housing-price appreciation


Read also:

FX Rates, Contrarian Investment and the Misleading Concept Called GDP


Eugen von Böhm Bawerk
“Value does not come out of the workshop, but out of the wants that goods satisfy” The quote by Mr Eugen von Böhm-Bawerk is as true today as it was more than 100 years ago, even though modern pundits often ignore the simple fact. This blog is not an attempt to revive Mr Böhm-Bawerks thoughts, life and deeds, but from a sober view of the world comment on and analyze ongoing events. We aim to take the analysis a step further. We question accepted truths and always strive to answer the simple question “why?” We are opinionated.
See more for 6b.) Bawerk

Permanent link to this article: https://snbchf.com/austrian/gdp-gdc-austerity-misleading-concept/


  1. Stefan Wiesendanger

    I am utterly confused. Does GDP not include investments as well? So for a country like China, there should be a very large difference between GDP and GDC but maybe my lack of understanding stems from my lack of familiarity with the term GDC.

    Also, I do not understand the table where you seem to equate output (Y), a flow concept, with the capital base, a stock concept. Clearly, if you don’t dedicate enough of your output to investment (I), your capital base will eventually suffer and you can say you are “consuming” it but this will be at nowhere close to the rate you present. Again, maybe I misunderstand something?

  2. George Dorgan
    George Dorgan

    I tried to make things clearer and updated my part of the post and left the one from Bawerk.

    The table is for the case that GDP is driven solely by consumption that absorbs the existing capital base.

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