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    AD = C + I + G + X - M

    All the A level economists are all taught this Docterine

    Including G in the AD equation (Output) is a fallacy in my opinion. G could spend $10million on diggings holes in the ground. Have $10million worth of goods and services been produced?

    Indeed G is not measured by its value to the economy but its cost.

    Get rid of G and you see a true picture of the economy?
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    But money spent by G still trickles down to workers digging holes, who will then use the money to purchase produced goods or services from elsewhere.

    not totally sure about this though....
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    ahh, the keynesian cross model, impossible to learn, (yet somehow managed to), but will be incredibly useful if you do ecomomics at uni. cant remeber the answer to your question though, might be somthing to do with the fact you have a closed economy maybe? probably wrong myself, been a while since i done it at uni.
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    Also W=J withdrawals=injections in a balnced budget economy, that has somthing to do with it aswell... but cant for the life of me remember what it was.
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    The measure of GDP doesn't make judgements on whether it is useful to society or not.

    If your Mum cooks a Sunday roast for 10 people, no service has been provided, all that she's done is enabled you to consume the food that had already been bought. But if you go to a kebab shop and buy a £2.50 greasy kebab then a service has been provided which contributes to GDP.

    So digging holes in the ground counts if people are receiving a wage for it, it counts if its private sector as well.
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    (Original post by W.H.T)
    But money spent by G still trickles down to workers digging holes, who will then use the money to purchase produced goods or services from elsewhere.

    not totally sure about this though....
    So government spending is converted into consumption. My point still stands.
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    How about reading the General Theory, and the counter-arguments advanced against it by Keynes' numerous economist critics (Hayek being perhaps the foremost), and then decide based on actual knowledge of the arguments behind those models whether you believe they are true or not.

    Right now you just sound like you've listened to a Ron Paul speech or two and decided that you now disagree with Keynes.



    Not saying you're wrong on your point of view, just that in economic terms you're barking up the wrong tree.
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    So digging holes in the ground counts if people are receiving a wage for it
    Nothing of value has been produced though.

    If a private individual was to buy the hole then a good has been produced.


    If you are too include all government spending then you might think that GDP is healthy. However if you consider that the government spending may have been completely futile then the GDP figures are misleading. Or atleast have little relation to the GENUINE wealth of an economy.
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    Right now you just sound like you've listened to a Ron Paul speech or two and decided that you now disagree with Keynes.
    Ron Paul is practically the only American politician that knows anything about Monetary theory that I have come across. And anyway if you listen to Ron Paul he is just echoing the words of Hayek.
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    (Original post by turn and fall)
    Nothing of value has been produced though.

    If a private individual was to buy the hole then a good has been produced.


    If you are too include all government spending then you might think that GDP is healthy. However if you consider that the government spending may have been completely futile then the GDP figures are misleading. Or atleast have little relation to the GENUINE wealth of an economy.
    are you sure you have the full equation, i remember there should be a tax symbol. people who earn wages pay tax thus... whatever it was
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    You're missing the point entirely. Your personal judgement as to the "worth" of the digging of holes is entirely irrelevent. What matters is that money is entering the economy in return for some good or service, and thats what we're trying to count with this equation. Don't overcomplicate things.
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    (Original post by Guru Jason)
    are you sure you have the full equation, i remember there should be a tax symbol. people who earn wages pay tax thus... whatever it was
    Tax is on the other side, seeing as its taking money out of the economy.
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    yep, you're right just read my economic notes from last year and the equation is right. i had trouble learning it tbh. try reading sloman and garrets essentials of ecnomics. it was the core textbook i used at uni and it helped me alot. im sure there must be some extract of it online somewhere.
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    (Original post by turn and fall)
    Ron Paul is practically the only American politician that knows anything about Monetary theory that I have come across. And anyway if you listen to Ron Paul he is just echoing the words of Hayek.
    No. No he isn't. Read Hayek before saying that.

    I'm not even sure yet whether I agree with Hayek, and I'm going to read the modern arguments in regards to monetary theory before deciding definitively, but having read him I can happily say he makes a lot more sense than most libertarians like Paul do.
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    (Original post by py0alb)
    You're missing the point entirely. Your personal judgement as to the "worth" of the digging of holes is entirely irrelevent. What matters is that money is entering the economy in return for some good or service, and thats what we're trying to count with this equation. Don't overcomplicate things.
    I agree money is flowing around the economy. But who cares about the flow of money. What matters is wealth.

    I think this is an important point to make because a lot of macroeconomic policy is based around the idea that GDP = Wealth (in some abstract sense). I am saying no it isnt.

    Consumption is a better indicator of economic performance I think. And I suspect in the UK consumption is in a terrible position. Ofcourse consumption is still not a perfect indicator because if £10 of goods have been consumed how much utilty has been given to society? You cannot know the consumer surplus. Thus even consumption does not tell you the wealth in an economy.

    Macroeconomics is plagued by the problem that a central authority just does not understand the economy, just as Hayek said. The only true signals that guide economic behavior are price signals?
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    (Original post by turn and fall)
    I agree money is flowing around the economy. But who cares about the flow of money. What matters is wealth.
    This coming from one who appears to believe he has an understanding of monetary theory.

    The flow of money is what a huge amount of Hayek's contribution to monetary theory was in relation to, and he was the first monetary theorist to assign real importance to where credit enters the economy and the effect that has on the trade cycle.
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    (Original post by turn and fall)
    AD = C + I + G + X - M
    That simple equation, too much aggregation
    Ignores human action and motivation



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    (Original post by turn and fall)
    I agree money is flowing around the economy. But who cares about the flow of money. What matters is wealth.

    I think this is an important point to make because a lot of macroeconomic policy is based around the idea that GDP = Wealth (in some abstract sense). I am saying no it isnt.

    Consumption is a better indicator of economic performance I think. And I suspect in the UK consumption is in a terrible position. Ofcourse consumption is still not a perfect indicator because if £10 of goods have been consumed how much utilty has been given to society? You cannot know the consumer surplus. Thus even consumption does not tell you the wealth in an economy.

    Macroeconomics is plagued by the problem that a central authority just does not understand the economy, just as Hayek said. The only true signals that guide economic behavior are price signals?

    I think you'll find that if you go on to study economics at university, there are a lot more sophisticated methods of modelling the economy than the equation you learnt at A-level.
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    (Original post by py0alb)
    I think you'll find that if you go on to study economics at university, there are a lot more sophisticated methods of modelling the economy than the equation you learnt at A-level.
    This is one of the things I find annoying about economics, you get people who have a sketchy knowledge of it thinking they know it all, not realising that everything you learn at A level and even intermediate level undergraduate, is based on loads of assumptions to simplify the model.

    Whenever you look at articles written by economists online in broadsheet newspapers or even the blogs of top economists like Krugman, Mankiw etc, when you read the comments below there are always some arrogant rebuttals of the article in question along the lines of "any A-level Economics student knows that...."

    This is like me reading a maths paper on complex numbers and saying LOL any GCSE student knows that you can't take the square root of a negative number.
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    (Original post by turn and fall)
    Consumption is a better indicator of economic performance I think. And I suspect in the UK consumption is in a terrible position.
    Yes it is because unemployment is high and people are fearing that the economy is going to get worse or at least, not get better for a long time.

    Investment is in a bad position as well because the banking sector is not lending because it also fears that the economy is going to get worse or at least not get better for a long time.

    So what is your solution to this conundrum other than cutting G?
 
 
 
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