UK Economic Growth for 2008 - BBC "News"

When is growth growth and when is it not?

Let's say a company turns over £1,000,000 a year. Next year, it turns over £1,025,000. This represents a growth in turnover of 2.5%.

However, the inflation rate is at 4%. Has the company grown by 2.5% or shrunk in real terms by 1.44% once inflation is taken into account?

Therefore, would some forum member kindly explain to me the following -

• If UK plc's economic turnover increases by 2.1%, as Ernst & Young's Item Club suggest it will in 2008, will the economy be considered to have grown or shrunk if the inflation level is higher than 2.1%?...

• ...and which measure of inflation would be most reliable to use as a measure against economic turnover increase?

My understanding is that recession is 2 consecutive quarters of negative growth. Is that negative growth defined as the "turnover" of the country decreasing or can it still count as a quarter for a recession if the "turnover" goes up but the inflation rate is higher.

If that makes any sense, your answers would be welcome!

There is a saying - Turnover is vanity, profits are sanity.
You example with a companies turnover is not economic growth, If turnover increases, then this does not mean the company is growing, just because it's activity increases and its spending more time meeting less valued consumer needs.

What 'economic growth' really is, at a fundemental level is meeting peoples wants in a legal way. Everybody is both a consumer and a producer engaged in meeting these myriad wants needs dreams and desires. If people can do this in less time, then more wants are met, because labour and resources price drops making consumers and producers richer.

The level of a firms profits may increase, even if less consumers are buying and it's turnover shrinks, as its using its resources in a more profitable manner.

While GDP is a measure of economic activity in the sense of market prices, it also has to be deflated to represent the rise in prices for the consumer for the same goods per year, which represents less profitable activity taking place in the economy, less needs being met - the economy is shrinking.

For example - GDP in Zimbabwe is in the quadzillion of zim in terms of the price of producers goods, the turnover has risen, but its unprofitable for the producers to produce goods, and consumers also cannot afford to buy them.

Thanks for that explanation, brainclamp.

I was wondering if the growth figures were another ZaNu Labour manipulation - saying that the country's turnover had gone up but not factoring in the cost of inflation. Apparently it isn't, so I appreciate you clearing that up for me.

I run a business myself and I've always loved the vanity-sanity saying. Unfortunately, the way things are going at the moment, I am neither vain or sane!

You want this.

http://www.hm-treasury.gov.uk/economic_dat...a_gdp_guide.cfm

That's totally cleared it up for me, jdc. Cheers!

Of course if you believe (as many do here, and I think they're right to a certain extent) that the inflation figures are unrealistic, then the GDP deflator might be wrong too in the same way, meaning growth is overstated.

Does this mean we aren't very good at forecasting so have removed our guess work so as not to be held accountable, or am I just a cynic?

I am always consistently surprised by how low the GDP deflator figure has been over the last ten years. Always somewhere around 2-3% per annum.

I am not saying I think it has been wrongly calculated but I seem to remember Mervyn King raising a question about the accuracy of GDP figures and hence GDP deflator a while back. Anyone else remember the details of that story?

I've always wondered about the inflation figures - there seem so many different measurements of it and depending on the economic condition at the time, different governments choose different measurements.

For example, are government 'services' included in the inflation figures, as they represent real and present costs that have to be met by citizens and businesses? We are all compelled under threat of imprisonment to pay for them.



Given the mass manipulation of figures by governments in general, particularly the one that started with Bliar and continues with Brownshirt, could one make a reasonable case for arguing that the country has been in negative growth for the last six months?

I think it means they weren't accurate to 3 decimal places.

Yes, the deflator is too low, and the changes to RPI and CPI overstate GDP.

There is no good reason why housing costs and rents are weighted out of GDP for example. There is no good reason why the cost of services provided by the council to each household is out of the inflation measure.

Real inflation is the level of costs each person incurs. If your known spending is rising faster than this real inflation level for example, 7%, rather than the 4% you get as a saver, you are better off spending and stockpiling what you can, and think about taking on cheap debt.

Water bills - up 9% this year. Food - 7%, council tax - up 7%.

The Government aren't very good at measuring inflation (click here for chart)

The money supply is the only true measure of inflation (click here for chart)

Except your wrong - the money supply alone is not a good measure of inflation.

Over a decade, the money supply may increase 3 fold, however when peoples wages and purchasing power increase, for example, through increased competition - privatisation, encouraging small businesses, breaking up big businesses, technology, the huge productivity improvements force prices of producing goods down and add new industries and jobs, there is more economic growth.

People are better producers and thier incomes buy them more as consumers. They also have a lot of opportunities. Price inflation is low.

A few hundred years ago, under the gold or silver standard, with a fixed money supply, these policies would still have produced all the same benefits, but a workers nominal wages would not have increased. Prices would instead have deflated - without nominal incomes dropping.

Thanks to all this activity, real purchasing power per unit of gold would have increased. However, anyone who held debt of 1000 gold coins to purchase a home, would have seen the real purchasing power of this debt rise - as the real value of money rose, a unit buying much more than it did before, yet his income is the same. Although unfair, this would not matter too much - the saver benefits and the debtor pays out of his same nominal income.

Except that sometimes under a fixed money supply nominal incomes fell as well, and for long periods - especially if the economic growth contracted in thier industry - for example when those same forces of competition and increased supply of farms meant farm prices fell during 1873-1896 - 'the great sag', due to increased competition for farms, and lower prices for produce. Great for consumers around the world though.

The second great deflation was of course due to an excessive credit boom in the 1920s, and the indebted suddenly found through price deflation plus income deflation (as false profits and credit dropped away), created a ever bigger debt burden, even though productivity and real wealth had increased.

So there is a credible argument that by holding the price level stable per unit of currency, by adding money to the money supply, and letting incomes and profits rise, without price inflation or deflation, the worker captures the full benefit of real economic growth, through rising real income (just as he would have before under the gold standard when his income stayed the same but prices dropped meaning he could buy more per unit of currency). Yet the debtor pays back in terms which correspond to the purchasing power of his orginal debt plus a premium for real interest, and thus price-income deflation cannot take hold, with the real value of the debt increasing. Instead the real value of the debt in relation to income largely decreases as real economic growth increases and nominal income rises.

Unfortunately, this is reduced to a nonsense now, with a clearly fake inflation measure which doesn't take into account houseprices, council taxes or any other real costs properly, and the elite have cottoned onto deflating real wages through mass immigration, and keeping real costs of fixed supply goods, out of the inflation measure, creating a vast division in wealth.

What happens to the real value of savings?

Savings, in thoery, increase according to the real increase in purchasing power (real interest rate) with increased economic growth. The pie per person gets bigger. The debtor is left paying his original slice, which hopefully has shrunk in terms of the overall pie, plus an extra bit.

Needless to say, the real interest rate is clearly negative today, as you get 6% in the bank, then are taxed down to 4% or less in your pocket without the capital and wealth to hire the expertise to exploit the many loopholes in the horror of a tax system left by Brown. So your savings return is 4%, and inflation in many areas is 7%.

Then you have to factor in that real costs of living - like houseprices, council taxes etc.. are left out of the tractor production/inflation figures. And thats a massive erosion of real purchasing power.

Also, looking back over 30 years, only the immense productivity booms and high economic growth period of the 80s and 90s saw increases in the purchasing power of real savings with interest. All other periods saw savings under moneytary threat of inflation and often actually negative in the headline numbers - although the inflation measure was more robust and hadn't undergone stealth changes back then.

Obvoiusly under mass immigration - the pie per person in real terms gets smaller, as per capita growth is negative when you add in real living costs.

Increased purchasing power doesn't seem to have been reflected in the price of houses.