In theory the GDP is the sum total of all value-added transactions within our country in any given year.
Here’s an example, though, of how far from reality GDP has strayed.
The reported number for 2003 was a GDP of 11 trillion dollars implying that $11 trillion of money-based, value-added economic transactions had occurred.
However, nothing of the sort happened.
First, that 11 trillion included $1.6 trillion of Imputations, where it was assumed - or imputed - that economic value had been created but no actual transactions took place.
The largest of these imputations was the “value” that the owner of a house receives by not having to pay themselves rent. Get that? If you own your house free and clear the government adds how much they think you should be paying yourself rent to live there and adds that amount to the GDP.
Another is the benefit you receive from the “free checking” provided by your bank which is imputed to have a value because if it weren’t free, then you’d have to pay for it.
So that value is guesstimated and added to the GDP as well. Together just these two imputations add up to over a trillion dollars of our reported GDP.
Next, the GDP has many elements that are hedonically adjusted. For instance computers are hedonically adjusted to account for the idea that because they are faster and more feature rich than in past years they must be more additive to our economic output.
So if a thousand dollar computer were sold it would be recorded as contributing more than a thousand dollars to the GDP. Of course that extra money is fictitious in the sense that it never traded hands and doesn’t exist..
What’s interesting is that for the purposes of inflation measurements hedonic adjustments are used to reduce the apparent price of computers but for GDP calculations hedonic adjustments are used to boost their apparent price which adds to GDP.
Hedonics, therefore, are used to maneuver prices higher or lower, depending on which outcome makes thing look more favorable.
So what were the total hedonic adjustments in 2003? An additional, whopping $2.3 trillion dollars. Taken together these mean that $3.9 trillion dollars -- or fully 35% of our reported GDP -- was NOT BASED on transactions that you could witness, record, or touch.
They were guessed at, modeled, or imputed but they did not show up in any bank accounts because no cash ever changed hands.
And, just to keep this trend rolling along, in 2013 the Bureau of Economic Analysis made even more huge, structural changes to GDP that - you guessed it! - served to boost GDP to even higher levels.
