Free Free Lunch by David Smith

tradition continued and was extended in peacetime. Nowadays, within a couple of months, we know to one decimal place how much the economy grew in the most recent quarter. The figures, like most economic statistics, are subject to revision but they are still testimony to how far the art of measurement has advanced.
    Most people, understandably, do not worry overmuch about whether the economy grew by 0.2 or 0.8 percent in the latest quarter, leaving such matters to those whose job it is to pore over the statistics. It does matter, of course. The economy’s long-run growth rate is about 0.6 percent a quarter, or about 2.5 percent a year. If growth stayed at this rate, year-in year-out, you would expect unemployment to remain steady. Why? Because each year we become more productive, increasing our output by 2 percent or so compared with the previous year. A lot of people do not believe this and think of themselves as being about as productive as they have always been. Think, though, of the way technology has replaced, for example, so many basic clerking functions in offices. If the economy did not grow at all or did so only slowly, then rising productivity would mean fewer workers were needed, hence rising unemployment. If it grows roughly in line with productivity, unemployment remains stable. Higher growth rates should mean falling unemployment, and vice versa. If the economy shrinks even for a quarter (‘negative growth’ is the clumsy term most economists use for this), the worry would be recession. If it grew by 1.5 percent in that quarter, the worry would be the opposite one of ‘overheating’. All this will become clearer a little later.
    The most useful thing about macroeconomic data, and in particular the national accounts, is not the precise information it gives us about any single quarter or year. It is, rather, that it gives us an invaluable framework for thinking about how the economy is constructed. If it were possible to observe the economy from above, it would consist of many millions of transactions by people spending, producing and earning. That is exactly what gross domestic product (GDP), the main measure of the size of the economy and of changes in that size – economic growth – seeks to measure. GDP is the sum of everything produced in the economy, hence gross domestic product . To avoid double counting, however, it is necessary to subtract at each stage the value of the inputs that have gone into producing a product. The chef in our expensive restaurant assembles and cooks the meal. He could not do it, however, without the vegetables supplied from the market that morning, the meat from the butcher or the gas or electricity supplied by the power company. His output, for the purposes of measuring GDP, is the value added to these various inputs. The same applies from the very largest company, making billions each year, to the smallest sole trader. The principle is exactly the same as value added tax, VAT. Some people, indeed, prefer to talk, not of GDP, but of ‘gross value-added’.
    Hang on though, where do earning and spending fit in? Do they fit in? The answer is that they do. GDP is often known as national income. The two are not precisely the same but broadly similar. GDP, as well as being the sum of everything produced in the economy, or at least the value added at each stage of production, is also the sum of incomes earned. It is easy to see why this should be. The income of our chef, assuming he is also the owner of the restaurant, is the amount we have paid him for the meal less the wages of his staff, the income earned by his suppliers and, say, the rent for the premises (the landlord’s income), which he has been obliged to pay. The value of the income earned by the various players equals the value of production.
    You may ask at this point how this relates to your own circumstances. Suppose you are a salaried employee for a profitable firm. Your income, plainly, goes to make up GDP. But