[dnu]

But that subsidy must come from somewhere. For every $.20 the widget company gets, some other company is taxed $.20

And GDP is a joke. If I buy your laptop for $1 bln, and you buy it back from me for $1 bln, nothing will change for us, but it will look very good on the GDP.

[brianchu]

That's not how GDP is calculated. In your example, GDP is unchanged. The laptop only affected GDP the moment you originally purchased the laptop from the laptop store, and at that moment GDP went up by the price you paid for the laptop (excl. taxes). Used goods transactions do not count in GDP calculations.

EDITS (replies to below):

In the case of the two poems, as archgoon points out, the government will collect sales and income taxes which is why that situation never happens... ever. And if you didn't report the transaction to the government to avoid taxes, GDP will be unaffected because GDP is a statistic that is reported by the government, which can't report things it doesn't know about.

Technotony is right about the smashed windows paradox. You could argue that the "value" that is added is the tradesman gets paid (income), and the shopowner gets a new window.

The GDP is not a perfect measure of the strength of an economy. There are plenty of valid criticisms. But it's certainly one of many useful data points.

[EliRivers]

Okay, we both write a poem and sell it to each other for a billion dollars. How's that? Or if you want something more physical, we both make an ash-tray by scraping a groove in a lump of wood and sell those to each other for a billion each.

[ajuc]

If only you 2 are doing this, this won't affect GDP much.

If everybody is doing this, prices rise aproprietely, and GDP corrected for inflation is still a good indicator.

EDIT: BTW there's a reason people don't generally sell cheap things for billions of $ - you'll both have to pay tax from that sale :)

And even if we assume no inflation - government can now invest these money, fueling economy, so this sale had at least some positive effect on economy.

[archgoon]

The government will cheerfully collect $300 million in taxes from each of you.

[EliRivers]

No worries. I'll pay them with a poem written on an ash tray.

[technotony]

A better example of the flaw in GDP is the smashed window paradox: if a thug breaks a shop window the owner of the window will have to fix it, paying a tradesman. That cost gets included in GDP but it's not really meaningful increase in society's value.

[intended]

??

This is taking the edge case and extrapolating it over the rest of the curve of possible activities.

Maintenance and repair are a subset of all business and economic activities. AFAIK its a subset of GDP calculations.

The rest of the value additive portions of the economy are captured, which is what GDP is supposed to roughly reflect.

Further, if there was a spurt of such activity, such as an earthquake - GDP output would fall, because now while work is being done to repair things, profits from more valuable actions such as making high margin products stops.

Your GDP growth rate, for that year drops, if not total GDP output, because now effort and energy is being directed at maintenance and not wealth creation.

[varjag]

Make that two laptops then, a billion each.

[coolj]

> But that subsidy must come from somewhere.

It doesn't have to. Sure, subsidies can help the overall economy. But when you're falling off a fiscal cliff, the debt ceiling is rising, and your credit rating has already been downgraded, you have to be careful to take long term eventualities into account. If a significant number of US businesses are relying on government subsidies and programs to be profitable, and that funding dries up, we're gonna have a bad time. Such subsidies and programs are a tiny fraction of US spending, but they are also low-hanging fruit when it comes time for cuts, as compared with military, medicare, and social security spending. Not saying that will happen, but leaning towards austerity may have been a better choice in the long run than trying to "jump start" the economy, especially if we double-dip (knock on wood!). Time will tell. Interestingly, US and UK unemployment rates as of October 2012 are identical at 7.8.

> For every $.20 the widget company gets, some other company is taxed $.20

There are many sectors of government where spending can be reduced to increase available revenue for subsidies or tax cuts. You need taxes, tolls, tariffs, etc to generate absolute government revenue, but subsidies can be carved out of existing budgets without new taxation. The question of the right balance of both taxation and austerity, to maximally benefit the recovery of the economy, in both the short and long-term--that is the real issue. Seems nobody's discovered the magic formula yet.