Sunday, June 24, 2012

Real GDP vs. Total Work: Historical Data from the US

This is a quick follow up to last week's post on the Wealth of Nations: Using the 2012 BP Statistical Review of World Energy.

In that article, I noted that the Purchasing Power Parity GDP is a better means of comparing the wealth of a nation with the wealth of the US compared with the nominal GDP. The nominal GDP between the US and other countries is biased towards Japan and Western Europe, and biased against China, India, Russia, and Canada. Though, the PPP GDP still appears to be biased against Russia and Canada; and in this post, you'll see that the real GDP growth rate often does not track the growth rate in the capability to do useful physical work.

In this post, I'll comparing the Real GDP growth rates in the US with the growth rates in Total Work Generated. In addition, I'll be plotting the population growth in the US, which has been fairly constant over the last three decades at roughly 1.1%/yr.
The data for the Real GDP comes from the World Bank. The excel files can be found here. The data for the Total Work comes from the 2012 BP Statistical Review of World Energy and a site for historical vehicle efficiency. As in the last post, Total Useful Work is calculated as "Total_Electricity_Generation[TWh] + (Oil_Consumption[MToe] + Biofuel_Consumption[MToe])*Efficiency_Converting_Fuel_to_Work[%]*11.6 [TWh/MToe] + Natural_Gas_Consumption[MToe]*0.6*0.1*11.6 [TWh/MToe]"

Note that 11.6 is the conversion factor between Millions of Tons of Oil Equivalent and TerraWattHours. 0.6 is roughly the amount of natural gas used to heat homes and cook, and 0.1 is the rough efficiency of using combusted natural gas to maintain the temperature gradient required to heat the home and to cook food.

Below is the graph that includes yearly growth rates in (1) Real GDP, (2) Total Useful Work Generation, and (3) Population. Also included in this graph are the historical averages between 1985 and 2011: 2.6%/yr, 1.9%/yr, and 1.1 %/yr, respectively. Note the wild swings in both Real GDP and Total Useful Work. There were three major economic downturns between 1985 and 2011:  1989-1991, 2000-2001, and 2007-2009 (the largest by far). Note also the dips close to or below 0%/yr don't last that long. It's almost like people fool themselves into thinking that X is a good investment (where X is housing, computer tech stocks, etc...), and then as soon as they realize that they made a bad investment, they make wiser decisions on how best to invest their time, money and work.

Saturday, June 16, 2012

The Wealth of Nations Updated Again: Total Electrical & Mechanical Work by Country using the 2012 BP Statistical Review of World Energy

It’s that time of year again. The pools are open, and BP releases it updated data of world production and consumption of coal, oil, gas, and electricity. Let me start with the real attention grabbers, and then I'll back up the statements with data from the 2012 BP Statistical Review of World Energy and graphs created using that data.
1) China's economy is rapidly catching up with the U.S. economy. If China maintain a rate of growth that is 10%/yr larger than the U.S., then in roughly two years, China will be able to generate as much electrical & mechanical work as the U.S.  What is also significant is that, last year (2011), China passed the US in terms of generating electrical work. Though, China still lags behind in the U.S. in terms of mechanical work from vehicles and total work.  (Note that last year I estimated it would take three years to surpass in the US in total work, and this year that number dropped to two years.) Unless something drastic happens in the next few years, China will surpass the US in terms of economic output as measured in [TW-hrs] by the year 2013.
2) The nominal GDP is not a good reflection of the wealth of country, i.e. the capability to do mechanical and electrical work. Of the standard ‘economic’ means of measuring the wealth of country, the GDP based off of Purchasing Power Parity is the best match for reflecting the capability to do work (i.e. wealth). However, the GDP PPP rankings for Russia and Canada are significantly below their rankings in terms of capability to do work [TW-hrs].
3) The nominal GDP values assigned to countries appear to be biased towards the U.S., Japan and Europe, and appear to be biased against China, India, Canada and most biased against Russia. For example, Russia generates more mechanical and electrical work than Japan, but the IMF calculates that Japan's nominal economy is three times larger than Russia's. The calculations of nominal GDP do not account for all economic activity within a country. The rural, collective or black market activity in Russia, China and India might explain why the GDP values of these countries are less than for countries that generate similar amount of work.

Saturday, June 9, 2012

Energy [kWh] as Currency [$]: An Attempt to Remove [Happiness life-years] as the Base Unit of Economic Theory

In Niall Ferguson’s book and videoThe Ascent of Money,” he details the history of how money has evolved throughout the ages in Western civilization. He first describes the use of clay tablets in Mesopotamia, and then slowly works his ways through the development of gold/silver standards, the rise of banks in Renaissance Italy, the success of the government bond market in Italian city-states and in Elizabethan England, the failures of the printing paper money in pre-revolutionary France, the ascent of joint-stock, limited-liability corporations in the Dutch Netherlands, the failure of Spain to adopt banking innovation after stealing gold/silver from South America, the successful rise of insurance companies in Scotland, and finally the failure of the 'Black&Scholes equation for pricing options'  to correctly model risk in the real world.
While I learned a lot about the history of money from this book, I don’t feel any smarter about what money is after having read Ferguson’s book. While it’s historically clear that we can reduce risk by forming large groups or through creating insurance, options and derivatives, there’s still a part of me that’s left empty after having read Ferguson’s book. What I largely took away from the book (and what I assume he was hoping to convey) is that we often think investments are safer than they really are. (This is also the theme of Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb.) Unfortunately, Ferguson’s book doesn’t study the underlying philosophy of life that allowed for banking to develop in places like Florence, London, and New York. There’s a part of me that wants to know: what philosophy of life developed in the West that allowed for banking innovations to be socially acceptable. Where did this philosophy of life develop and who developed it?
All I really learned from Ferguson’s book is what has worked and what has not worked in the past. And while this is definitely important, there’s just too much of me that wants to ask: “What’s the underlying structure to the economy? Is there any way to give a simplified account of what is occurring? Is there any fundamental principle to tell us the optimal amount of currency in circulation?” Physicists want to know more and more about the underlying structure of nature. Philosophers want to know more about the underlying structure of our reasoning.
And economists should be interested in learning more about the underlying structure of the economy, and they should not be content with just a statistical knowledge of the economy, i.e. how to use insurance, options or derivatives to remove risk. Right now, it seems that many libertarians are simply following in the footsteps of thinkers like Milton Friedman, focused on freedom and removing silly regulations from the economy. And why I think that this is important, especially in the highly government-controlled and highly government-regulated field of electricity generation, I think that it will be hard to affect public policy in this field until people change their underlying philosophy of life. And I don’t think that people will change their underlying philosopgy of life until we tackle the major problems in the field of economics.
Here’s a quick list of the some of the problems I see (in the form of unanswered questions):
1)    “What is the definition of wealth?” 
2)    “What is the definition of growth?”
3)    “How much currency should be printed or removed from circulation at any given point in time?”