Correlation Between spending limit and GDP

While a few reductions have been made to the debt limit, the ceiling has generally continued to rise. According to the U.S. Treasury Department, Congress has acted 78 separate times since 1960 to permanently raise, temporarily extend, or revise the definition of the debt limit.

The limit currently stands at around 75 percent of U.S. gross domestic product (GDP).

“It’s only in recent times, as U.S. debt has been allowed to approach the ceiling, that it has been used for rather blatant political leverage purposes,” says Kirkegaard.

In the past few years, opposition Republicans have made support for raising the debt limit contingent upon spending cuts and other policy changes.

This year’s standoff, which pushed Washington closer to the brink than ever before, generated consternation among many Americans. Markets and nations around the world — including China, Washington’s top creditor — also might have wished that the debt ceiling were scrapped. But don’t expect that any time soon, Kirkegaard says.

So, what is GDP?

Following Khan’s Academy economics lessons, the diagram below shows how GDP is defined. It includes all labor, parts, and production stages in say, a year. To not double count, only the final product (jeans in blue) made within the country counts toward the GDP. Otherwise we would be double or triple counting. Notice how each component of the definition is sketched out.

Screen Shot 2014-08-26 at 4.22.37 PM

 

Gross Domestic Product is just that: domestic, as described in the (blue) definition in the graph above. This means that products from (American) companies who go international with their production, are not included in the GDP.  Yet the American stock market is doing very well. It seems to me that all this talk of shaming American companies to go overseas with their production only represents a small % of what would have been part of the US GDP if it had been produced in the USA. I will look at that figure in a later blog. Does anybody know?

What GDP does not reveal
It is also important to understand what GDP cannot tell us. GDP is not a measure of the overall standard of living or well-being of a country. Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being. So, for example, increased output may come at the cost of environmental damage or other external costssuch as noise. Or it might involve the reduction of leisure time or the depletion of nonrenewable natural resources. The quality of life may also depend on the distribution of GDP among the residents of a country, not just the overall level. To try to account for such factors, the United Nations computes a Human Development Index, which ranks countries not only based on GDP per capita, but on other factors, such as life expectancy, literacy, and school enrollment. Other attempts have been made to account for some of the shortcomings of GDP, such as the Genuine Progress Indicator and the Gross National Happiness Index, but these too have their critics.      Tim Callen is an Assistant Director in the IMF’s External Relations Department.

One thought on “Correlation Between spending limit and GDP

  1. Just about all of what you claim is astonishingly accurate and it makes me ponder why I had not looked at this with this light before. This particular piece truly did turn the light on for me personally as far as this specific issue goes. But at this time there is actually one position I am not necessarily too comfortable with so whilst I attempt to reconcile that with the central idea of your position, allow me see exactly what the rest of the visitors have to say.Nicely done.

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