Exposing the Private Side of GDP

Let’s get down to business

We are finally free from the endless posts about the service-side of GDP. While the economy is basically run by consumers, private business also plays a large role in the economy. We saw that this component of GDP, called Gross Private Domestic Investment (“GPDI”), was 17.6% of GDP in 2018. And here is how that ratio has looked over time:

GPDI has a pretty neat property to it in that a best-fit linear trend (the dashed line) is almost exactly flat over time (i.e. equal to the long-term average). It helps provide a common anchor point for the trend. Although GPDI is flat in the long-term, the underlying trend is volatile. In fact, GPDI is the most volatile component of GDP.

GPDI is essentially business investment. All the big evil corporations spend money and that is part of the economy. It’s not as big a part of the economy as we the people, the mighty consumer, but let’s also not forget that we spend money based on what the big evil corporations brainwash us sheep to do. So, obviously what business does is important.

Businesses are also smart. When market conditions begin to deteriorate or when the CEO realizes that the sheep aren’t buying as many sheep products as they used to, business cuts back on investment and spending. Look at all the shaded recessions and it is pretty obvious to see the pattern that GPDI drops off significantly in bad times.

But, the big evil corporations aren’t completely evil! GPDI is made up of things like residential construction (the homes we live in), investment into new products, technology, and equipment that will make the economy grow even bigger and increase the economic pie for us all to eat. It’s fun to put a bad guy label on private enterprise but its an integral piece of the economic engine. But, of course, everyone dislikes when the “check engine” light comes on so…we don’t always like every aspect of the engine that helps take us where we are going!

In the same way that we could dive deeper into goods and services, in the next post, we will dig into GPDI a little further and find more interesting trends about all the big evil loveable private businesses.