Economics question for the monetary geeks

[OUinFLA]

As I tell my wife regularly, when I want to know something significant, I refer my searches to South Oval first.

I have a simple grasp of monetary movement around the country.

I sell a product and receive money.
I pay my company bills to the companies who provide me services or products with that same income.
I buy some groceries and the grocery chain makes a profit on some of the money.
My wife and I eat at the local restaurant and they make a profit on the money I had for income.
We donate to our church each week a portion of our income from sales.
I buy gas for my boat with some of that money from the sale of my product.
We pay our utility bills with some of the money from the sales of our product.
I pay several employees a paycheck again from the same money I sold my product for.
I pay for my cars from a major car corporation with some of that money.
And so on and so on.
If there is any left over, I save a bit, invest a bit in stocks, pay down loans, buy something I want, or pay to have my teeth cleaned or buy medical needs, and of course pay taxes to the government.

Ok, so the money I received from the sale of my product goes lots of directions. The directions it goes trickles through the same process for each place I spend my income. Their income is dispersed the same way to other business and those business disperse it to their expenses and employees.

I basically understand GDP and as I interpret it, it is the amount of goods produced in the country and sold. A one time dollar figure based on the sale of goods produced ?

Assuming I have that correct so far, my question I have is this.

If I have gross sales of 10,000 (simplifying the amount) and I disperse 99% ( estimated amount for this question ) of that amount to other businesses, and save the rest, and they disperse 99% of the gross income they receive and then the business's down the line each spend 99% of their company's gross income, and so on and so on throughout the year,
How much money is actually spent each year in this country by all the businesses or individuals who actually have their hands on that money at some time during the year?

It seems to me that a dollar will be spent a very large number of times during a year. That is the figure I am trying to come up with. To me, it is significant amount more than the GDP.

Even taxes are spent somewhere and re-enter the dollar circle again and again and again.

I don't know if savings should be considered, even though I know the banks will use this money and lend it out to someone else who will spend it somewhere. Even stock investments would have a sizable amount of that invested money being spent with some sitting in the corp bank savings which the bank holding it can also use to disperse into the system.

So, how much $$$ are actually spent during a year in this country?

[Mjcpr]

Eleventy billion.

[olevetonahill]

Just one, every one shares it,

[OUinFLA]

I knew I could count on you guys, just wait until I show my wife how smart y'all are.

[olevetonahill]

I knew I could count on you guys, just wait until I show my wife how smart y'all are.

She already knows Im handsome :hot:

[pphilfran]

Easy...I will let ST handle this one....

[Sooner5030]

read up on the velocity of money, money multiplier, and M0 M1 M2 M3.

[OUinFLA]

read up on the velocity of money, money multiplier, and M0 M1 M2 M3.

Why would I do that? I have South Oval at my disposal.

Do you have an answer for 2010?

[Chuck Bao]

So, how much $$$ are actually spent during a year in this country?

I think economists closely track velocity of money which is basically total value of all transactions divided by the money supply (money in circulation plus liquid demand and savings deposits), or in other words the turnover of money. It is a very good indication of economic activity and possibly a warning of either inflation or deflation.

I am not sure that answers your question.

[pphilfran]

M0

Laura has ten US $100 bills, representing $1000 in the M0 supply for the United States. (MB = $1000, M0 = $1000, M1 = $1000, M2 = $1000)
Laura burns one of her $100 bills. The US M0, and her personal net worth, just decreased by $100. (MB = $900, M0 = $900, M1 = $900, M2 = $900)

M1

Laura takes the remaining nine bills and deposits them in her checking account at her bank. (MB = $900, M0 = 0, M1 = $900, M2 = $900)
The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess reserves.
The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 = 0, M1 = $1710, M2 = $1710)
Laura writes a check for $400, check number 7771. The total M1 money supply didn't change, it includes the $400 check and the $500 left in her account. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
Laura's check number 7771 is accidentally destroyed in the laundry. M1 and her checking account do not change, because the check is never cashed. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
Laura writes check number 7772 for $100 to her friend Alice, and Alice deposits it into her checking account. MB does not change, it still has $900 in it, Alice's $100 and Laura's $800. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
The bank lends Mandy the $810 credit that it has created. Mandy deposits the money in a checking account at another bank. The other bank must keep $81 as a reserve and has $729 available for loans. This creates a promise-to-pay money from a previous promise-to-pay, thus the M1 money supply is now inflated by $729. (MB = $900, M0 = 0, M1 = $2439, M2 = $2439)
Mandy's bank now lends the money to someone else who deposits it on a checking account on yet another bank, who again stores 10% as reserve and has 90% available for loans. This process repeats itself at the next bank and at the next bank and so on, until the money in the reserves backs up an M1 money supply of $9000, which is 10 times the M0 money. (MB = $900, M0 = 0, M1 = $9000, M2 = $9000)

M2

Laura writes check number 7774 for $1000 and brings it to the bank to start a Money Market account (these do not have a credit-creating charter), M1 goes down by $1000, but M2 stays the same. This is because M2 includes the Money Market account in addition to all money counted in M1.

Foreign Exchange

Laura writes check number 7776 for $200 and brings it downtown to a foreign exchange bank teller at Credit Suisse to convert it to British Pounds. On this particular day, the exchange rate is exactly USD 2.00 = GBP 1.00. The bank Credit Suisse takes her $200 check, and gives her two £50 notes (and charges her a dollar for the service fee). Meanwhile, at the Credit Suisse branch office in Hong Kong, a customer named Huang has £100 and wants $200, and the bank does that trade (charging him an extra £.50 for the service fee). US M0 still has the $900, although Huang now has $200 of it. The £50 notes Laura walks off with are part of Britain's M0 money supply that came from Huang.

The next day, Credit Suisse finds they have an excess of GB Pounds and a shortage of US Dollars, determined by adding up all the branch offices' supplies. They sell some of their GBP on the open FX market with Deutsche Bank, which has the opposite problem. The exchange rate stays the same.

The day after, both Credit Suisse and Deutsche Bank find they have too many GBP and not enough USD, along with other traders. Then, To move their inventories, they have to sell GBP at USD 1.999, that is, 1/10 cent less than $2 per pound, and the exchange rate shifts. None of these banks has the power to increase or decrease the British M0 or the American M0; they are independent systems.

[Sooner5030]

OUinFLA,

GDP is not an actual "real" number. It's a statistic/inference that allows folks to compare economic output given a period of time. It includes all products and services that are traded......allegedly. It includes all government spending (net of taxes), savings and investment spending and so on.

the rate that the currency or digital 1/0s changes hands between institutions and spenders is the velocity of money. The status of that currency (circulated at banks, investment, in circulation) is usually noted as M0 M1 M2 M3.

I haven't studied in years time but other econ folks could tell you more.

[pphilfran]

OUinFLA,

GDP is not an actual "real" number. It's a statistic/inference that allows folks to compare economic output given a period of time. It includes all products and services that are traded......allegedly. It includes all government spending (net of taxes), savings and investment spending and so on.

the rate that the currency or digital 1/0s changes hands between institutions and spenders is the velocity of money. The status of that currency (circulated at banks, investment, in circulation) is usually noted as M0 M1 M2 M3.

I haven't studied in years time but other econ folks could tell you more.

If it is not right it is damn close...

[olevetonahill]

Money is like Fruit cakes
theres just a few around but every one keeps sending em on to other peeps.

[Sooner5030]

by the way....I'm an Austrian/Mises econ fan so most folks would disagree with me on things.

[Mjcpr]

What's the deal with Ovaltine?

[pphilfran]

I use these guys and get the data monthly...only quarterly from the fed...they update past estimates monthly and end up with the same end data as the fed...

you have to have a subscription to get all of their info...but they put enough fee stuff out each month that I can track in myself...

http://www.e-forecasting.com/US_Monthly_GDP.html

[StoopTroup]

I knew I could count on you guys, just wait until I show my wife how smart y'all are.

it all sounds fishy to me

[pphilfran]

it all sounds fishy to me

Brim size fishy or flathead size?

[OUinFLA]

Brim size fishy or flathead size?

in my case it begins with aquarium size fish

[StoopTroup]

Angel Fishy

[OUinFLA]

OUinFLA,

GDP is not an actual "real" number. It's a statistic/inference that allows folks to compare economic output given a period of time. It includes all products and services that are traded......allegedly. It includes all government spending (net of taxes), savings and investment spending and so on.

the rate that the currency or digital 1/0s changes hands between institutions and spenders is the velocity of money. The status of that currency (circulated at banks, investment, in circulation) is usually noted as M0 M1 M2 M3.

I haven't studied in years time but other econ folks could tell you more.

I appreciate that.
Im less interested in economic output than I am total dollars spent in a year in the US. Is your first paragraph implying that GDP is the same as total dollars spent? I thought it was total dollars sold.

velocity I can see would have an effect on total dollars spent. Higher velocity means dollars are being exchanged for something at a higher rate. Wouldn't there be a way to take velocity and money supply to determine a total spenditure amount?

[OUinFLA]

Money is like Fruit cakes
theres just a few around but every one keeps sending em on to other peeps.

You're a fruit cake.

Oh, and my wife says your not exaclty handsome, but you're not exactly ugly either.

As to your smarts, so far she is not impressed by your answers in this thread, but she did understand the fruitcake analogy. Did you receive ours last Christmas? We never heard.

[Sooner5030]

velocity I can see would have an effect on total dollars spent. Higher velocity means dollars are being exchanged for something at a higher rate. Wouldn't there be a way to take velocity and money supply to determine a total spenditure amount?

actual $s are not the only part of a transaction. If I trade in a truck worth $20k and pay $20k cash the dealer still books sales revenue of $40k. He debit'd cash 20k, PPE 20k and credit'd sales $40. The economic value of the transaction added to GDP would be $40k even though only $20k of FRNs were traded.

[OUinFLA]

actual $s are not the only part of a transaction. If I trade in a truck worth $20k and pay $20k cash the dealer still books sales revenue of $40k. He debit'd cash 20k, PPE 20k and credit'd sales $40. The economic value of the transaction added to GDP would be $40k even though only $20k of FRNs were traded.

do you play baseball?
you've got a heck of a curve.

:D

geeze, I was thinking I would get a simple answer, something like
6 Trillion Dollars give or take a few hundred million.


on the other hand, your answers are probably going to provoke more questions from me.
like: Do I now need to be thinking of used trucks sitting on the sales lot as dollars in trasition?

[Sooner5030]

I could start with a long story about how everyone used to trade gold/silver but it was too heavy to transport for simple trading. So these dudes all had someone hold their gold/silver in exchange for a receipt. The receipts were for small quantities of the gold/silver that was used in trade. The folks that exchanged goods for those receipts could then go to the storage area and claim some gold/silver.

then some gold/silver storage guy figured out that at any given time not everyone would come and claim all the gold/silver. Since this was the case he could actually give more receipts than gold and make a small profit off of fees and interest.......

nevermind.sorry

[OUinFLA]

work on the simple answer please
:)

[Chuck Bao]

I appreciate that.
Im less interested in economic output than I am total dollars spent in a year in the US. Is your first paragraph implying that GDP is the same as total dollars spent? I thought it was total dollars sold.

velocity I can see would have an effect on total dollars spent. Higher velocity means dollars are being exchanged for something at a higher rate. Wouldn't there be a way to take velocity and money supply to determine a total spenditure amount?

I don't think so. GDP is neither total dollars spent nor total dollars sold. Think of it this way - it is the net production of goods and services. Manufacturing companies are adding value in processing the raw materials they use. Wholesalers, distributors and retailers are supposedly adding value by getting that product to the end user.

The national income accounts actually measure GDP both ways - on the production side and on the demand side and they have to balance.

The demand side is basically consumption + investment + exports - imports +/- inventory change and fudge factors. In a very rough manner you can use the demand side of the national income accounts for expenditure. But be sure to use nominal GDP and not the real or inflation-adjusted GDP number unless that suits your purpose better in comparing over time. You may also want to deduct the exports and imports portion if you only want domestic demand without external trade. I have no idea how you would adjust for inventory change, but your guess is as good as mine.

I have spent many hours over the last 20+ years developing my economic models and forecasts and trying to get those blasted numbers to balance.

GDP is a very "real" number. Although I have been critical of the way it is calculated or highlighted the fact that the composition of US GDP has changed substantially over the last 20 years. It is still the best measurement that we have. Forecasting the economy without the national income modeling is just not credible, in my opinion.

[olevetonahill]

You're a fruit cake. :D

Oh, and my wife says your not exaclty handsome, but you're not exactly ugly either. :O

As to your smarts, so far she is not impressed by your answers in this thread, but she did understand the fruitcake analogy. Did you receive ours last Christmas? We never heard.

Yup it came early , so in the spirit of stimulating the Fruit cake economy I then forwarded it on to Flag.;)

[Serenity Now]

I feel smarter now.

Tangent: does the ever growing "extremely" rich and their growing wealth lead to less spending overall?