Increasing National Proceeds

By Hema Senanayake –July 31, 2015

Hema Senanayake

The word “output” is an important word in economics because the wellbeing of people depends upon the output produced by any country. The popular measure of national output is known as GDP (Gross Domestic Product). The GDP is defined as the value of all products and services produced in a country. The products and services mentioned here are related only to the real economy. Why? It is because, certain services do not directly support to increase the wellbeing of people.

For example, Christina Wang, the Senior Economist in the Research Department, Federal Reserve Bank of Boston, USA) says that, “earning interest is not … a productive activity that contributes to GDP.” Since, in relation to financial institution she further observes that, “…this is obviously sensible in the case of passive investors who buy market securities and then merely receive interest or dividends without producing new goods or services. It seems only logical that the same principle should apply to financial institutions as well. They should not be counted as generating value added and contributing to GDP simply because they earn asset returns.”

However, this does not mean that banks and financial institutions do nothing to contribute to GDP. Instead financial institutions do contribute to GDP when they pay their employees who in turn expend money on consumption and to pay taxes. Also, financial institutions do contribute to GDP when these institutions purchase products and services from the sectors in real economy. All these contributions capture in calculating GDP indirectly through the parameters known as “Consumption (C), Investments (I) and Government expenditure (G). You may all know that if we use the popular approach in calculating GDP, the GDP = C+I+G+NE, whereas C, I, G are referred to as above and NE is defined as net exports. The point I want to make here is that the expansion of financial sector is not same as the expansion of agriculture or industrial sector or education and health-care sectors. Why is this important?

It is because the country should be able to increase the output of real economy in order to increase the wellbeing of people. But for a practical sense I prefer to use a term known as national proceeds in regard to real economy, even though it is not calculated like GDP. According to John Maynard Keynes total national proceeds are the sum of all proceeds of income generating enterprises of the real economy. The concept of national proceeds is not a difficult concept to understand. Let me explain it briefly.Read More