andrew kliman (Andrew_Kliman@CLASSIC.MSN.COM)
Fri, 14 Nov 97 19:09:37 UT

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I was wondering if someone could answer a question of mine about the national
income and product accounts.

The textbooks and dictionaries say that only the value of "final" goods and
services is counted in GDP, GNP, etc. The textbooks also make an argument
that only "final" goods and services are counted because otherwise you have
"double-counting."

If, however, the GDP (etc.) is understood as a measure of value added, this
argument is clearly wrong. The easiest way to see this is in terms of Marx's
reproduction schema:

Value added during a period is

(Iv+Ip) + (IIv+IIp),

where p is profit.

The value of final goods and services is the value of Dept. II's output,

IIcu + (IIv+IIp),

where IIcu is the *used-up* constant capital of Dept. II.

The two measures are equal if and only if

(Iv+Ip) = IIcu.

Basically that means they are equal only under simple reproduction (in value
terms), because the basic condition of expanded reproduction (in value terms),
as Marx showed, is

(Iv+Ip) = IIcu.

Instead of the false equation of value added and the value of final goods and
services,

(Iv+Ip) + (IIv+IIp) = IIcu + (IIv+IIp),

the correct identity is

(Iv+Ip) + (IIv+IIp) =
IIcu + (IIv+IIp) + {[Icu + (Iv+Ip)] - [Icu + IIcu]}.

In other words, the right-hand side must include the expression {.}, in
addition to final goods and services. {.} is the value of Dept. I's output
[Icu + (Iv+Ip)] minus the constant capital used-up during the year [Icu +
IIcu]. That is, {.} measures the increase in constant capital over the
period.

Now, it seems to me that the NIPA actually get it right when, in calculating
the RHS according to the "expenditures approach," they include spending on new
structures (plant) and equipment, as well as the accumulation or decumulation
of inventories. Together, these items measure the increase in constant
capital, if I'm not mistaken.

So my question is, why do they say that only production of "final" goods and
services is included? If the NIPA are correct, then this isn't correct,
because new factories (plant), machines (equipment), and stocks of steel,
coal, fabrics, etc. (inventories) are definitely not "final" goods -- they
re-enter production.

Can anyone help?