Friday, May 16, 2008

Chinese Earthquake Raise Oil Price

The price of oil rose to a new all time high of more than $127 per barrel per day. The reason was apparently the Chinese earthquake. Many people would perhaps have expected the earthquake to, if anything, lower the oil price as it will temporarily lower Chinese economic growth and so cut demad for oil there. But as much of the negative supply shock will occur through problems in coal distribution, which in turn means that the need rises for a substitute in the form of oil.


Anonymous newson said...

apologies to the chinese, this query is way off message.

i've been reading an interesting discussion between you and shostak from feb 2006 re: gdp and its usefulness.

my question is this - where do you stand on the reisman view of gdp? that is, gdp is an inadequate proxy for economic growth due to its omission of intermediate productive steps.
jackson, skousen, corrigan, and shostak seem to share this opinion.

unfinished goods and inventories account for large amounts of capital, so surely it can't be right just to wait till intermediate goods become final goods? a finished good is automatically replaced by other goods in various stages of completion.

the gross output series produced by the bea would give credence to reisman's view, would it not?

"consumer spending is 2/3 of gdp" - the rallying cry of all keynesians - tell me it ain't so!

skousen also makes the point that in the leading indicator indices of most developed economies, consumer sales are either absent or a small component.

2:35 PM  
Blogger stefankarlsson said...

Newson, maybe this will disappoint you, but I don't believe in the Reisman/Skousen broader measure of economic activity. In fact, to the extent GDP is flawed in this respect, it is because it is too broad.

Including intermediate transactions fully as output does in fact create double counting. To see why, take a hypothetical example of person A who in the beginning of January sells a newly made car to person B, only to buy back the car at the same price in the beginning of February and so on each month for the rest of the year. Obviously no value is created by sending the car back and forth between person A and person B, but using the Reisman/Skousen definition would mean that the car would be included as output at a value 12 times its actual value.

Incidentally, intermediate inventories not yet sold are in fact included in GDP under the inventory category. However, when they are sold the inventory value is subtracted from the value of the final sale as far as contribution to GDP in the period of the sale is concerned. This reflects the value added approach of GDP, which means that only the value added created in a transaction is added to GDP.

It could however be argued that capital goods that depreciate over time similarly involve double counting and that therefore Net Domestic Product, which exclude depreciation, is better. However, because GDP is more easily available and with more details and because GDP and NDP usually develop very similarly, I still usually use GDP rather than NDP.

As for countering the Keynesian focus on consumption, I don't think that should be made by statistically inflating savings. In fact, that could be counterproductive as it could then be argued that we already save so much so we don't need to save more. The case for savings is instead based on the fact that it is necessary in order to expand investments and therefore productive capacity.

That consumer spending is not a leading indicator of the business cycle is true, but irrelevant for the issue of how to treat intermediate transactions.

7:10 PM  
Anonymous newson said...

one thing you didn't address is the bea "gross output", which i'd thought was ammunition for the reisman point of view.

what about the criticism of gdp including government spending, wealth-destroying though that may be?

i don't have an emotional attachment to any particular line of reasoning. whichever argument is the most convincing gets my vote. up to now, i'd been won over by reisman et al. i find national accounts devilishly complicated.
thanks for the reply.

5:26 AM  
Blogger stefankarlsson said...

Newson,the BEA publishes very many different measures, GDP, GNP, NDP, NNP, NI and so on. So merely being published by the BEA hardly even comes close to indicating validity.

As for government purchases, they probably have lower value than private spending. However, they certainly don't have zero value or even close to that as an overwhelming majority of the people obviously want government services

11:47 AM  
Anonymous newson said...

i guess you've seen these two corrigan articles on the gdp question? i thought his japanese example interesting.

2:24 PM  

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