Chapter I
WHAT IS GDP?
Widely used by international organisations, national governments, enterprises and academic institutions today, GDP is a popular topic of discussion. However, what is GDP? Where does it come from? How is it calculated?
I.GDP as a Product of Western Economics and the Statistical Practices of the US, Europe and the United Nations in the 20th Century
GDP is the abbreviation of gross domestic product. It is the most important and also the most macro concept in macroeconomics. As one of the most comprehensive economic indicators, it is used to measure the final goods and services produced by a country or a region within a given period of time.
Paul A. Samuelson and William D. Nordhaus, two famous American economists, made a classic summary of the status of GDP: “While GDP and the rest of the national income and product accounts (NIPA) may seem to be arcane concepts, they are truly among the great inventions of the 20th century.”1 How did GDP become one the great inventions of the 20th century and how has it maintained that position ever since? There are three reasons:
First, GDP stemmed from the development of Western economics. The Great Depression in the late 1920s and the early 1930s not only presented a severe challenge to the governments of the US and Europe, but also created a distinct impact on economic circles. Before the Great Depression, classical economics held a dominant position. Adam Smith (1723–1790), the Scottish scholar and representative of the classical school, lived in an orderly and harmonious environment without being troubled by disturbances unlike many other great figures in the history of economics. In 1764, he “began to write a book to pass time,” and that book, The Wealth of Nations, had a huge impact on later generations. In the book, which was published 12 years later in 1776, when the US declared its independence, the laissez-faire principle was the cornerstone of his economic school of thought.
The laissez-faire principle, competition and the theory of labour value became the main features of the classical school of economics which was represented by famous scholars such as Adam Smith, Thomas Robert Malthus, David Ricardo and John Stuart Mill. The classical school held the dominant position for over 100 years after the publication of The Wealth of Nations, which has had a far-reaching influence. According to T.H. Buckle, the English historian of civilisation, The Wealth of Nations is “in its final analysis probably the most important book that has ever been written,” and the one that has “done more towards the happiness of man than has been effected by the combined efforts of all the statesmen and legislators, even if history only has official record of the latter.”2 13 years after the publication of the book, the French Revolution broke out. In France, Adam Smith’s thoughts on economic freedom resonated among those pursuing the philosophy of freedom. The most noteworthy of whom was Jean-Baptiste Say (1767–1832), a French businessman, political activist, author and economist. He read The Wealth of Nations in 1788. Using Adam Smith’s theory on economic freedom, he did a lot of thinking on and research into the economy of France, Continental Europe and North America. 15 years later, he published his own work, A Treatise on Political Economy, thus becoming the foremost advocate of Adam Smith’s theory in Europe and North America. He created a law named after himself — Say’s Law of Markets. According to Say’s Law, there essentially can never be overproduction in any economy because he firmly believed that “production or supply creates its own demand.” The theoretical basis of Say’s Law is that there is no essential difference between a monetary economy and a non-monetary economy (in a non-monetary economy, a worker is capable of buying any product that the factory may produce).
Influenced by Say’s Law, the classical school affirmed that there could be no overproduction, and that the economy is always operating at its full employment level. As a result, there is an invisible hand in economic operations which plays a self-correcting role. A conclusion was reached that the operation of a national economy did not need intervention from the government through monetary or fiscal policies.
The introduction of Adam Smith’s
The Wealth of Nations into China has been a long and tortuous process. In the past 109 years, three Chinese names were successively used for the book:
Yuan Fu The Origin of Wealth),
Guo Fu Lun The Wealth of Nations) and
Guo Min Cai Fu De Xing Zhi He Yuan Yin De Yan Jiu An Inquiry into the Nature and Causes of the Wealth of Nations). In 1965, Mr. Wang Yanan, a famous Chinese economist and one of the translators of Karl Marx’s
Das Kapital, gave a systematic account of this process. Yan Fu, a Chinese reform scholar, had the book translated into Chinese at the end of the 19
th century and published in 1902. The Chinese version was entitled
Yuan Fu 3 Following the footsteps of Adam Smith in advising the King of England to bring wealth to both the king and his people, Yan Fu presented the book to Emperor Guangxu, hoping that it might contribute to the reforms in the late Qing Dynasty. However, after its publication, the book failed to arouse any significant attention. Of course, the main reason for this was not the excessive abstruseness and abridgement of the translation, but that the actual social, economic and cultural conditions in the late Qing Dynasty fell far short of the requirements in the book.
Nearly 30 years later in 1931, Mr. Wang Yanan and Mr. Guo Dali once again translated the book into Chinese and had it published with a new name.
Guo Fu Lun When introducing their intention in re-translating the book, Mr. Wang Yanan wrote:
After another 34 years in 1965, Mr. Wang Yanan presided over the revision of the Chinese translation of the book and changed its name from
Guo Fu Lun into
Guo Min Cai Fu De Xing Zhi He Yuan Yin De Yan Jiu published by the Commercial Press. In 2009, 44 years later, Commercial Press republished it as a part of the
Series of Famous Scholarly Works in the World of Chinese Translation.
The laissez-faire principle of Adam Smith and Say’s Law influenced Western economics and government behaviour for about 150 years. During this period, the world economy did not experience any widespread, continuous or extremely violent shocks. However, things were quite different in the late 1920s and the early 1930s. The Great Depression produced huge unemployment. Factories were shut down, causing a massive production downturn, and there was no end in sight. Classical economics could neither explain the cause of such an unexpected grim situation nor provide any solutions. Under such circumstances, John Maynard Keynes (1883–1946), a British economist, appeared on the scene. He launched a revolution which was known as the Keynesian Revolution in Western economics.
American scholar Henry William Spiegel maintained that Keynes was the first 20th century economist who could be compared with the elites of the 18th and 19th centuries who designed economics and showed the economic circle the way. In 1936, Keynes published the General Theory of Employment, Interest and Money (the “General Theory”). This was a major event with a huge impact on the course of history comparable with Adam Smith’s The Wealth of Nations and David Ricardo’s On the Principles of Political Economy and Taxation. With its realistic, clear-cut stance and sharp style, the General Theory directed criticism towards the classical school and caused a stir among economists. The book expounded on a series of important arguments: the first was that national income is equal to expenditure on consumption and investment. If full employment cannot be realised through national income, this indicates insufficient expenditure. The second was that among expenditure on consumption and investment, the expenditure on consumption is more passive and tends to change along with income changes. The third argument was that income change is caused by change in investment and is reflected in an amplified manner. The fourth point was that expenditure on investment is determined by the relationship between its return on investment (ROI) and the interest rate, and the interest rate reflects the public’s preference on holding assets through the form of cash flow. The fifth argument claimed that insufficient expenditure — not enough to realise full employment — may be increased through stimulating consumption and investment. Finally, private investment may be supplemented by government investment. In other words, private investment may be supplemented with compensatory expenditure from the public authorities, which will result in compensatory economics and partial socialisation of investment. Keynes put forward an entirely different macroeconomic theory — a new theoretical analysis framework designed to observe economic operation and the influence of external impacts. This framework includes two extremely important concepts: the aggregate-demand theory and the aggregate-supply theory. The classical school assumed that as values and wages are elastic, the aggregate-supply curve is vertical. On the contrary, Keynesian economics insisted that prices and wages lack elasticity and the shape of the aggregate-supply curve is almost horizontal or upward-sloping. According to Keynesian economics, it is absolutely impossible for supply to create demand for itself, and demand is relatively independent. When an economy is in operation, there is no self-correcting mechanism that may restore the economy to full employment. In other words, the so-called invisible hand of market forces does not exist.
Samuelson and Nordhaus pointed out that the core contention between Keynesians and classical economists was whether the economy has a powerful self-correcting mechanism and whether full employment may be maintained through elastic prices and wages. Classic doctrines generally emphasised long-term economic growth and proposed to abandon policies to stabilise business cycles, while Keynesian economists called for a regulation of the business cycle with appropriate monetary and fiscal policies to stabilise business cycles. Simply put, the differen...