Basic economic units.

Two businessmen meet on a business trip and one ask the other if he will buy some product.  They shake hands.  First returns from his trip and tries to find ways to create this product, second returns from his trip and tries to find ways to implement the product.

There are two primary schools on economic principles. Supply side economics states that a new unit (product or service) has to be produced first, and by creating this new unit, a demand for this unit will be created, and more units therefore produced.  Demand side economics states that there has to be a demand for a unit first, before resources are allocated to actually create a unit to meet this demand.  What is created first, chicken or an egg?  While the answer is academic, and could be presented differently, the real important thing to keep in mind here is that some action must occur somewhere.

That action will first create exchanges between primary parties involved, and then create ripple effects through the rest of the parties chained to initial action.  When you throw a pebble in a pond, it matters not weather someone instructed you to throw a pebble or you’ve decided to do it yourself, the energy released from the pebble will create waves running across the pond.  The waves created in a pond from a pebble will exist until all energy is dissipated and the water either becomes still, or the waves will be overrun by new waves created by dropping other pebbles in a pond.  Similarly an economic unit life-cycle exists in economy.  Economic units created in economy can either dissipate, or be replaced by other units.

Extending this pond analogy, the size of the pond will dictate the amount of energy pond has potential to absorb, or an amount of optimum output a real economy could generate.  The number and the size of pebbles dropped, is the amount of the output real economy is generating.  Many waves on collision will waste energy, just as in real economy non-core services, or overhead, that does not contribute to new economic units being generated in economy.  GDP (Gross Domestic Product) measures output or energy in the economy.  GDP does not separate throwing a new pebble in the pond, or lifting the old one and throwing it in again.  It is simply represents how many units are currently being generated, where they comes from, and nothing about the real cost to the economy for each unit generated.

If government spending is a part of calculating GDP, and as originally intended, all government spending comes from receipts from GDP, what is the real unit cost of government spending?  The government also borrows and prints money to contribute to GDP, so what is the true cost of those units in economy?  We’re not looking for exact answer here, just a basic understanding that each unit of government spending is more expensive than any direct unit generated in GDP.  A less expansive units will provide faster sustained GDP growth, and a more costly units will provide slower sustained GDP growth.