Actually, I think you are right Hellestal, now that I look at it. Sales commission is counted, because sales is a service provided in the time period the GDP is counted. But does that mean the full profit? Hmm, I think by saying up to 1500, that makes your statement pretty correct; but in the real estate example it is stated that only the commission is counted and not the profit on the sale. So is it the profit or just the sales commission that is counted? Furthermore, if it was sold at a loss by the dealer but a salesperson makes a commission based on the sale price of the car would that be included in GDP? I think it would because the sale is still a service performed even thought he dealer did not make a profit. What do you think? (My apologies to anyone for whom I am making this thread overly boring).
Yes, yes I know, as I wrote above, the mixing of the terminology commission and profit is where I am lacking clarity in understanding, OK I will admit that you’ve done a pretty thorough job in countering my points - but can we call a truce on the snark(yes I know I’ve been dishing it out also even though I shouldn’t because I’m a noob). This conversation is pretty interesting, it is really helping me get a fuller, more detailed grasp of things I knew a little bit about. And don’t just assume because I don’t agree with you its because I haven’t read something or am ignorant.
While I appreciate your praise, Mr. Nylock, I need to emphasize that Hellestal is the board’s expert on economics. I’m just good at popularizing basic concepts.
In this particular case, however, Hellestal, I’m finding your more recent posts to be more understandable than some of what you wrote earlier which may be Mr. Nylock’s issue. It’s always hard for experts to understand where non-experts are stumbling.
Thank you for reading the cite again.
Keep in mind that I did say this topic is difficult. I understand exactly why it’s tempting to come at this topic in another way. We have this everyday word that we use, “create”, and in normal contexts, it conveys a perfectly understandable meaning. But when we’re digging into things more deeply, then in order to create a consistent and coherent picture of what we’re talking about, we must let go of at least some those intuitive meanings. We have to deal with two things simultaneously: the subjectiveness of our own values, and also the objective reality of how the world physically works. And somehow we have to come up with a language that navigates through that. It is not easy.
Trade really does create value – just the act of moving something to a different place can make people better off. Then once we take physics literally, we can realize that “creation” is really the same sort of act, even if it is often much much harder to pull off.
Yeah, I realized I screwed up a few posts into it. Then it’s the backtracking, and the question is how far to back up while keeping the same thread…
I can’t imagine why Karl Smith would go through this in 101. Seems crazy to me. Maybe he’s just thought about the technique more thoroughly, but then, he said he had problems too. In that post of his I cited, there’s a (dead) link to a 3D printer making a wrench. All the material to make the wrench is already there, it just has to be shaped. Maybe starting with a powerful visual like that is the way to go.
But the wealth is gained in placing the item where it can be the most productive. Take Plutonium (properly stored). Let’s say that I had a vat of it in my living room. What good would it do? Nothing at all. I don’t know the first thing about nuclear energy, so it would just collect dust.
What if I donated it to the local nuclear power plant? They could use that plutonium to turn into electricity to power homes.
Just by giving something to someone, wealth has been created.
As far as your gold example, the wealth is not the $1200. The wealth is in the increased utility of the transfer. You have 1 ounce of gold; I have $1200. We both agree to exchange. I have a secure (mostly) investment and you have $1200 of folding green to buy food, shelter or whatever. We both win. Now, of course, your hypo was that we then immediately trade back. Then, of course, no wealth is exchanged.
The market theory assumes rational actors who are acting in their best interests. Sometimes people make mistakes and destroy wealth. That is a bug in the system which doesn’t appear too often.
If I buy a dozen eggs and immediately throw them in the dumpster, I have not made the best use of them and have destroyed wealth, but most people just would not buy the eggs in the first place.
American money would effectively become instantly near-worthless, and some other form of currency would come to be used, whatever it might be. In the short term all economic transactions would be in the form of barter. The economy would fall apart in a day and the world almost unimaginably impoverished.
To respond to your other post now:
A real estate agent doesn’t buy and sell houses personally (they don’t take ownership). The seller is unloading directly to the buyer, and the agent as intermediary sells their services with a clear price to help facilitate the transaction. That commission is the “value” of the service, and the price of the commission is added to GDP. The value of the house, as a “previously existing” investment good, is not at all relevant (except insofar as it affects the size of the commission). That means that if the seller made a profit from holding the property, that profit from the house appreciating is capital gains and does not count toward GDP. The increase in the value of the house is treated merely as the changing value of an asset that “already” existed, pretty much the same as a stock changing value.
Used cars might seem a little trickier at first. A used car dealer will often buy the car outright, hold it for a time, and then sell the car for more later when they find a buyer. At first blush, that might look like a capital gain enjoyed by the middleman, as if they’re good at investment. But these macro statistics were designed to be as helpful as possible within the limits of our data collection, not to blindly stuff numbers into the most convenient slot.
Is it a capital gain? No. Obviously not. The dealer can sell the car for more than they bought it not because the car’s value has been re-evaluated as an investment over time, but because they offer a clear service: the ability to bring together buyers and sellers who will never actually meet because their needs to complete their own transactions were at different points in time. The higher price of the good is the result of the service that was provided, and the service exclusively. Their profit represents their own value-added to the process, and so that profit indisputably belongs to GDP. And because they’re a legal business, it’s child’s play to include such dealership profits in the macro statistics using normal sampling methods.
There can even be more value-added to the process. A used car dealer might buy a beater for 500, then put in 1000 worth of parts and repairs to sell the car later for 2000. The relevant number for GDP is 1500. This was the value-added, some of it in parts and repairs and some of it for the service for finding a new buyer. (Using the “final good” idea of GDP, the cost of the parts should not be included in GDP when the dealer bought them, but only after the car is finally sold.)
It’s weird, but here’s the key thing to keep in mind: These official numbers are a compromise.
We have an ideal concept of GDP. We also have real world limitations. We’d like to get as close to the ideal as possible, but we operate within the limits of our ability to collect data. When we look at used car dealers, we can be thankful that it’s actually pretty easy. We’re wanting to find a way to measure the service that they’re providing while also ignoring the car. Profit is the obvious way to do it, the difference between what they buy for and what they sell for. But if there were a company that bought and sold used houses in the same way a dealer sells used cars, well, for practical reasons, we’re not likely to look at the two businesses in the same way. The used house dealer is going to be treated like a stock investor, just based on the nature of the asset. We’re going to treat it as speculation, and so the profits will all exclusively be capital gains and not counted in GDP. Why? Well, they probably are speculators. Their primary goal is most likely to get lucky with market appreciation, rather than to provide a service and act as a bridge between buyers and sellers. We know this because the used house market normally works through agents who don’t bother with ownership. It’s a judgment call, and it’s almost certainly a good one. Any new real estate agent that took the plunge to hold property, looking for buyers without any hope of asset appreciation, would be extremely weird. That possibility is discounted for GDP figures, and the reasoning is quite solid when we lay out the reasons. Real estate commissions fit the ideal much better than housing speculators.
I reread some of what Hellestal wrote yesterday, and I have to say to me it is very succinct and I found it pretty easy to understand once I took the time to chew on it a bit. I find his or her depth of knowledge to be very impressive actually, and I appreciate the responses I received. Of course, as I am quite novice in this subject (Hellestal referred to me as half educated, but that maybe that is a little generous - perhaps quarter educated is more accurate), my opinon probably requires a few grains of salt but FWIW I think his explanations are worth reading fully for anyone interested in this subject. I think with all the wackiness in the thread (which I admittedly contributed to) I think I was suffering from thread fatigue when he joined the conversation, so I wasn’t really open to anything that needed to be chewed a little before it could be digested.