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By A Smith (anonymous) | Posted September 05, 2009 at 00:09:17
JonC >> Loaning money doesn't count towards the GDP, but spending it does. It doesn't matter if it is spent well. It doesn't matter if I go bankrupt or go bananas. If I spend money, the GDP goes up.
Imagine there are two island nations that each borrow $1 billion dollars. The first nation takes that $1 billion dollars and builds a great resort and buys a fleet of fishing boats. The second nation spends the loan on imported food and beer. At the end of that year, what nation will have PRODUCED the most goods and services?
Because GDP = C + I + G + (X - M), this means that the first nation will have positive C, I, G (if they want government) and because they also attracted lots of high paying tourists and sold lots of tasty fish, they will have net exports of $200 million. The net result will be a GDP greater than zero.
In the second island's case, (C)onsumption is $ 1 billion, (I)nvestment is zero, G is zero and net exports are negative $1 billion (eXports ($0)- iMports ($1 billion)).
As a result, the second island's GDP is zero.
They end up producing NOTHING, because they didn't work, but only consumed the resources they imported from others who did create wealth.
Therefore, unless debt is used for the production of goods and services, it adds nothing to GDP, because by it's very definition, GDP tells us how much a particular jurisdiction PRODUCES.
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