by Dirk Ehnts, Econoblog101
I just stumbled over a very nice figure from Destatis, Germany’s statistical office. It shows GDP and how you arrive at the correct number using the production, expenditure and income approaches. It is shown below.
My favorite approach is to use the middle and right columns. In order to grow the economy, stuff has to be produced. If that is a good assumption, then we can ignore the left column for the moment. Now, the question of GDP is decided by expenditures, which create income. The second and third column are intertwined. Expenditure is to some extent financed by income, to some extent by increasing (short-term) debt. For instance, probably most of consumption is financed by income, most of capital formation by decreasing saving or increasing debt.
Put that way, it becomes clear that a rise in debt will generate more GDP if the deposits borrowed (through loans, issue of bonds, etc.) are spent on goods and services. Therefore, especially lending in the real estate sector is expansionary. This is one of the main drivers of investment, which itself is the most volatile component of GDP.
