Does More Spending Boost GDP? The Misuse of the Expenditure Approach

The Expenditure Approach sums up various spending, resulting in an identity: \(GDP=C+I+G+NX\). This identity is valid for calculating the already produced GDP because it is merely a classification and summation. However, it does not represent the causality in production of GDP. It is incorrect to increase government purchases (G) to compensate for the decrease in consumption (C) and investment (I) and keep GDP unchanged.

First, consumption, investment, and government purchases are distinct in how the money is spent. Consumption and investment involve spending one's own money on one's own affairs, while government purchases involve spending other people's money on other people's affairs. Macroeconomics must measure the total output of the economy in terms of value. It uses purchasing expenditures to measure total output in practice. However, Keynesians do not appreciate that only economically justified expenditures contribute to GDP, while unjustified ones correspond to pseudo-GDP, which reduces wealth instead of creating it. Government investments and government expenditures are most likely to produce pseudo-GDP. It is safe to argue that Keynesian economics is a theory of government intervention without a proper theory of government. As for net exports (NX), although used in GDP accounting, it cannot explain GDP's production because accounting focuses on accuracy without duplication and cares nothing about how GDP is created. In accounting for GDP, it is fine to exclude imports because they are not created domestically, which, however, does not mean that imports create no GDP. As an example, the value of the imported product was at $100,000 upon import and it has now appreciated to $200,000. Does importing create GDP in this case?

Second, production of GDP requires consideration of causality while its accounting does not. Overlooking this difference will cause an inversion of cause and effect. It is how Keynesianism attributes the consumption component, a result, as the cause of GDP production.