Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Sunday, November 1, 2009

I Don't Mean to Nitpick, But...

You have no doubt read the news. The WSJ headline reads: Economy Snaps Long Slump, GDP's 3.5% Rise May Mark End of Recession; Recovery Weak, Reliant on Stimulus. See here. I reproduce their figure at the right.

Evidently, consumer spending "led" third-quarter growth (note the implicit use of the theory that consumer spending "drives" growth -- it is hard to get reporters to think outside the Econ 101 box). The 1% figure is, I think, rightly attributed in part to the "cash for clunkers" program.

My nitpick is the following observation. Almost all of these expenditure components (save exports) consists of spending on both domestically produced goods and imports. What fraction of this 1% is accounted for by spending on imported motor vehicles and parts?

It would be more informative, I think, if all these expenditure components had imports subtracted off individually; rather that summing them all up and then subtracting off total imports (the -2% figure in red).

Given the way the numbers are presented here, we have no idea to what extent the government subsidy stimulated domestic production (which is what goes into the calculation of GDP), as opposed to total expenditure. In short, did the "cash for clunkers" program simply encourage Americans to purchase foreign vehicles; and, if so, to what extent might one argue that this program encouraged the domestic production of vehicles (as opposed to foreign production)?

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