patrick.net

GDP = C + I + GS + Net exports

C= Consumption (private sector)
I = Investment (private sector)
GS= Government Spending (public sector)
Net exports = the difference between total exports and total imports

An obvious Keynesian equation, completely flawed.

1. Consumption is the reward for production. It is not production itself. If you produce X baseballs in the year 2010, but don't use them until 2012, the production and resulting GDP contribution was in 2010, not 2012.

2. Investment itself is not production. Merely buying $100 million of Pets.com stock doesn't mean you've produced $100 million worth of wealth. Investment can lead to production, but is not production itself.

Building capital goods and infrastructure, whether by government or some other agency, is production.

3. Government spending certainly isn't production. Paying people to break windows and then replace them costs a lot but contributes nothing to the GDP. Even rebuilding after a natural disaster contributes nothing to the GDP.

http://www.youtube.com/embed/I2QHj75Ulmo

Government can spend on developing infrastructure and capital goods, which would be legitimate contributions to the GDP, but spending by itself is not a product.

4. Net exports has nothing to do with GDP, but trade balance. If a country produces $100 billion of wealth in a year it's GDP is $100 billion regardless of how much it imports or exports. Once again, economists confuse real world issues by using fictional accounting methods.

If you want to measure the real GDP, it would be a better method to measure the actual dollar amount of first-hand sales of goods and services. Of course inflation and other accounting games makes even this metric less accurate, but it's better than the equation above.