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Tags: Money | National Debt | gdp | inflation

GDP Provides Valuable Lessons in Economics, History

GDP Provides Valuable Lessons in Economics, History

(Yong hian Lim/Dreamstime)

Hans Baumann By Thursday, 05 January 2017 12:33 PM Current | Bio | Archive

Since 1970 the U.S. Gross National Product (GNP) rate of change has been shrinking from 6.5 percent to the current 2.2 percent, while the Chinese economy went from a high of 15.4 percent in 1993 to the present 6.7 percent, and is still falling.

Not to despair, we are in good company with Japan being down — at 0.6 percent.

What causes this drift? One important reason is that industrial production in developed countries has matured. The industrial era has come to an end.

Besides software and electronics, demanding few workers, there are no new products requiring massive employment. Another contributing factor — albeit less important — is the shrinking population in countries like Japan for example.

According to the U.S. Census, the U.S. population currently still increases by about one percent per year. This theoretically assures  a minimum rate of increase in U.S. GDP of one percent per year.

One positive factor associated with the drop in the rate of the GDP is the shrinking of inflation. The following table shows a correlation between the GDP and inflation.

Why is there low inflation in the United States?

The answer may be that supply and demand are fairly balanced. While the government injected billins of dollars into the economy — causing only increases in assets — low wage increases kept the demand side pretty constant; while there is sufficient supply, thanks in part to debt financed imports from foreign countries amounting to a steady 480 billion dollars per year:

Country: GDP Increase (Percent): Inflation (Percent): 
U.S.  2.0*  1.5
UK  2.5  1
Germany  1.5  0.8 
France  1.2  0.4
Japan**  0.6  -0.5

* Current estimate
**The decrease in GDP already started in 1984 due to stagnant industrial production.

All data is based on 2015 numbers.

Governments try to artificially increase their countries GDP numbers.

One way is to add government employees in order to fatten the GDP. This reduces un-employment (always a political plus) while their salaries are added to increase GDP numbers. The reality is that the salary of government clerks has no real value and therefore adds nothing to a real Gross National Product.

The question is, can low GDP growth really be harmful, other than resulting in no more increase in the living standard of the people?

Here is one answer:

In a society where there is a perfect balance between production and consumption there can be no inflation and no change in Gross National Product save for the effects of changes in the population.

Of course, if you really want to have a three percent GDP increase all you have to do is increase wages and prices of goods.

So don’t be scared, human history records periods where such balances between supply and consumption occurred. One such period was during the Middle Ages in Europe. This may be defined as the period between the 12th and the 18th centuries A.D., during which time there was no or very low inflation. The reason was that the economy was based primarily on agriculture. Supply and demand was fairly balanced.

Here, the farmer provided food while the village artisans created needed essentials.

Additionally, most of the economy was based on bartering.

However, there were periods of major interruptions causing high inflation and major drops in GDP. One was the bubonic plague devastating Europe between 1347 and 1350 A.D.

It killed about one-half of the population. The resultant labor shortages caused food prices to increase rapidly since many farm lands remained untilled for lack of workers.

The second upset occurred after 1545 when Spain imported massive amounts of gold and silver from South America causing an oversupply of coins (there was no paper money) debasing their value in goods.

This monetary inflation lasted until the 18th century.

Discounting the effects of population changes, according to a study by Elio Lo Cascio and Paolo Malanima, GDP per person increased from $427 in 1000 AD to $997 in 1700, an increase amounting to only 0.2 percent per year, testifying to the balanced economy which later underwent drastic changes through the advent of the machine age.

To survive trends one has to learn to adapt, not to deny their existence.

You may wonder why U.S. productivity is shrinking? Blame it on iPhones.

Hans Baumann is a licensed engineer in four states and a member of Sigma Xi, the Scientific Research Society. He is an adviser to the dean of the University of New Hampshire Business School. Baumann has published manuals on valves and was a contributor to many works including the "Instrument Engineers' Handbook" and the "Control Valves Handbook." He has also published several books on business management and German history. His book "Hitler's Escape," suggests that Adolf Hitler did not commit suicide and survived World War II. For more of his reports, Go Here Now.

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Since 1970 the U.S. Gross National Product (GNP) rate of change has been shrinking. Not to despair, we are in good company with Japan being down also.
gdp, inflation
Thursday, 05 January 2017 12:33 PM
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