Replies

You wrote:

1. "The final price of goods sold includes all the steps to make and add value to the product."

2."If the author's concept were to be used, then products would be sold below cost and someone would be losing a lot of cash."

First, it is ludicrous to think that the prices paid for consumer goods are anything like an accurate gauge of economic activity. What consumer spending shows you is a single element of economic activity... that in which people buy "stuff". The choices people make in spending... or not... have almost ZERO connection to the spending cycle or capital cost in making those goods available. Timing of consumer purchase decisions, in particular, are short range decisions, while the capital investments made to enable their production are based on long range FORECASTS of what people will probably want.

Second, it is easy enough to find MANY easily understood examples of this in the market. The opposite, however, would be hard to justify with evidence. How many consumer products do you know of that people pay for before they are made, so that the "cost" of their production is connected to the purchase price paid? Instead, what you see is companies raising capital, spending money to build factories, design products, buy materials, package products, ship them to stores... all before the first consumer purchase is possible. Their PLAN for investing to enable consumer purchases doesn't guarantee that sales will occur... or that the sales revenues will cover costs, much less make a profit. Even successful products will operate in the loss column for YEARS before they begin to write in black marks in company ledgers. Microsoft "sells" game consoles... really gives them away, hoping and expecting to make enough money on future sales of games that the really HUGE sunk cost in producing those consoles will eventually prove justified. If Microsoft never sells more than a handful of games... because a competitor offers superior consoles or game products that consumers prefer to buy... the real MS investment in production of consoles and games... doesn't cease to exist in terms or real past expenditure... it instead ceases to exist as real future value. If no one buys a single MS game, that doesn't mean the salaries already paid cease to exist, that the economic activity they represented didn't exist, because there isn't a direct connection between them and consumer spending in the form of completed sales.

The entire economy operates that way. Companies raise capital and invest (spend) in a forward looking fashion and WITHOUT buying "stuff" in the form of finished consumer goods. Consumers buy what is available when they want and can afford it. The Dot.Com bubble was an extreme instance... in which much of the economy was inflated by "irrational exuberance" (in Greenspan Speak) in NON-consumer "economic activity" most of which never really existed as "production" of anything of real value... and about ZERO of which could be discerned from any consumer spending pattern. Yet, despite all the failure and lost investment... the internet HAS had real economic impact and has made the economy more efficient... just not in a way in which that efficiency was easily reaped as profit by most Dot.Com startups.

Maybe you're too young to remember "gas wars" when that related to prices cut below cost by gas stations on opposite street corners, instead of the more obvious modern implication... but I'm sure you've seen "going out of business sales" which really were more than a come-on?

So, in a useful measure of overall economic activity "The final price of goods sold" DOES NOT "include all the steps to make and add value to the products" of the entire economy. The final price of goods sold is a market function... not a cost function... and it is independent from spending involved in making the investments enabling or the cost of materials involved in production. The assumption that price reflects an intrinsically profitable balance in supply and demand is wholly specious. Price reflects a competitive dynamic... not a balance. Some products succeed and make money equal to or greater than that invested in them. Others do not. There IS waste in the economy. Not all products made ARE sold... or sold for more than they cost to produce. Not all investments pay off... and arguing the reverse in any of this is to argue that all investments pay off, that all stocks always increase in value... a theory you are welcome to test in the market yourself.

The beauty of this is that efficient production is enhanced by risk taking, including the large long range investments in future failures. It is better to over-produce and have some products fail to return their investment... than to try and match production to demand with supply in a command economy. Products that DO succeed make up for losses in broad economic terms... which is not the same thing as saying that ONLY measuring goods sold in a particular channel... is the same thing as measuring ALL economic activity. Consumer spending measures... consumer spending.
Why would you expect it to be a proxy for other economic decisions that have radically different drivers, cycles and timing considerations?