Liu Shijin (刘世锦)
Development Research Center of the State Council, Beijing, China
Abstract: Afteranalyzing the defects of gross domestic product (GDP) as a statistical indicator, this paper identifies and defines the concept of gross final product (GFP), emphasizing the attribute of GFPas the final product of a natural process and the actuator of the entire economic system.The paper also investigates the roles of foreign trade, production investment, public goods and private goods in economic growth under the GFP perspective, and explores the possibility for the GFP analytical framework to explain the economic growth process.
JEL:O47
Key words: gross final product, economic growth
1. Does GDP Really Represent the “Final Product”?
As an indicator for measuring the aggregate of economic activity, gross domestic product (GDP) plays an irreplaceable role yet it has also aroused great controversies. The invention of GDP as an economic indicator marks a milestone in the long journey of mankind’s understanding on the overall outcome of economic activity. The elevated perspective of GDP sheds light on the overall size and structure of economic activity and enables an understanding and analysis of economic operation and long-term development at a macro level.
With the implementation of China’s reform and opening-up policy, the system of national economic accounts generally adopted by market economies replaced the previous gross product statistical system under the Soviet-style planned economy. After being officially introduced as an aggregate indicator in the system of national economic accounts, GDP growth became the primary objective of development for various levels of government in China. In China’s market economy,one specific form of competition is local competition among individual tiers of government. Provinces, cities, counties and even towns and villages compete to attract movable resources by improving the allocation of local immovable resources. Since the benchmark of their competition is GDP, such competition is also referred to as the “GDP championship”.
While promoting economic growth, competition has also caused various side effects such as environmental pollution, overconsumption of natural resources and widening the income gap. As a result, more and more criticisms of GDP are being voiced and some of them attribute problems arising from the course of development to the indicator of GDP itself. There is no doubt that GDP is not a flawless measure. For instance, it does not take into account the negative externalities of the environment amid economic growth, cannot directly reflect the efficiency of growth, and as an aggregate measure tends to conceal structural problems. Domestic and international attempts to improve the accounting method of this indicator never stopped, including“green GDP”that takes into account environmental factors and the inclusion of R&D spending into the statistical scope of GDP. Despite effective implementation of such improvements, attempts to find a flawless indicator have yet to bear fruit.
As a matter of fact, the real problems derive from the systems and mechanisms underlying such an indicator. With more balanced and sustainable development goals, a set of mutually complementary indicators can be found and corresponding incentives can be created. In this sense, improving government performance evaluation indicators and thus deepening institutional reform naturally become an important item on the agenda for subsequent reform initiatives.Here, our critical comments on GDP are made from another perspective: what needs to be questioned is whether the understanding that GDP represents the “final output”is correct in the real world of economic operation.
Observed from the perspective of the aggregate demand or total expenditure approach, GDP consists of consumption, investment and net export. In order to measure the newly added value of a society during a certain timeframe, GDP is usually accounted on a quarterly or an annual basis. Yet if we broaden our horizon, it can be found that what has directly to do with and is “consumed”by consumers is only the partial product of GDP; the other part of product such as machinery, equipment and workshops returns to the manufacturing process. In this sense, the final product during a statistical timeframe is different from the final product in the “natural process.”
Another question is whether all products under an investment account areof the same attribute and usage. Obviously, such items as housing and infrastructure underan investment account are significantly different from machinery and equipment.The main reason for housing to be classified in the category of investment is its possession of capital attribute, i.e., real properties can be leased and sold to acquire a return on capital. But the primary attribute of housing is a durable consumer product that meets people’s housing demand, which is essentially not different from such durable consumer goods as automobiles and refrigerators. An investment in housing must be supported by the condition of the lessee or buyer taking residence; otherwise returnson investment cannot be realized. Hence, the investment attribute of housing is supported by its nature as a consumer product. On the other hand, with financial deepening, a multitude of consumer goods are endowed with certain financial attributes. For instance, automobiles and refrigerators can be purchased in installments and on credit, which means that these consumer products are incorporated into the process of profit acquisition for financial products and also take on the attribute of investment return. As far as housing is concerned, most housing properties serve as dwellings of the property holders themselves and are not held as investments.
Similar confusion also exists in the attribute of infrastructures. Parks, theaters, libraries, city squares and expressways are closely related to the improvement of people’s quality of life and the upgrade of the consumption structure, particularly the growth of service-related consumption. They usually appear in the form of public goods and serve specific consumption functions. Residents of bustling cities may take strolls in parks, dance in the squares, watch operasin the theaters or travel on the expressways. Without such infrastructures, the level of consumption will suffer. Disparities in the level of consumption between urban and rural residents largely have to do with the availability of such infrastructures. It is true that infrastructure including energy, transportation, communications and water conservancy servesthe production process. Nevertheless, with a rising level of development and growing proportion of the tertiary industry, household consumption as a non-production sector accounts for an increasing proportion of such infrastructure services. In reality, the production and non-production functions of infrastructures are often intertwined. For example, if a highway is open for both freight and passenger traffic, it would be technically difficult to make a clear distinction.
Classification of housing and infrastructure in the category of investment not only contradicts their intrinsic consumption attribute but runs counter to people’s daily experiences as well. More importantly, if housing and infrastructure are seen as remotely related or irrelevant to consumption, it will give rise to misperceptions about the structure and tendencies of the national economy. Further analysis on this argument will be made in the following sections of this paper.
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