Are consumption vouchers a government's expenditure?

   During pandemic, the government wants its citizens to spend more on consumption so that the economic situation can improve. Therefore, it gives away consumption vouchers worth $5,000 to each eligible citizen. The question is: how should such vouchers be counted in GDP (gross domestic product)?   

   Actually, quite a number of students have ever asked me this question and they had different answers in their minds. In fact, I also posed this question to a layman who has never learned any economics. My conversation with the layman makes me know better why some confusions may appear. In the process of thinking about the reason why, I've also learned a lot. I would like to share with you my thoughts.

   I asked the layman: Do you think consumption vouchers should be counted as "private consumption" (C) or "government expenditure" (G)? Nonetheless, this layman has no idea about GDP and I have to briefly explain the concept first. 

   I said: GDP has five components: C, investment, G, export and (minus) import. The layman was already puzzled at this point as in this layman's impression, GDP is about growth, not about C, investment, etc. I used the simplest way to explain this point: Yes, GDP is related to production but any goods produced may be used by someone and there are five types of users -- private consumers, investors, government, etc. Hence, depending on who use the goods produced, or the purpose of producing the goods to serve which type of users, we can decompose GDP into C, G, etc. 

   Barely understanding this logic, the layman then tried to answer the question: should vouchers be counted as C or G? Both seem to be correct. The voucher is for consumption, and so it seems to be C. But it is also a government's expenditure, and so it seems to be G. Eventually, the layman chose the answer C, and explained: although the government spends the money (voucher) on consumers but it is the consumers who use the vouchers to buy goods. 

  This answer is correct but the explanation is obviously not ideal. It is correct more or less due to a random choice. But it catches a key point: the final step of the spending is made by the consumers, not the government. Why it is the final step that matters? Don't forget. GDP is about final goods. If a spending item does not affect the production and demand of the final goods, it's not GDP. So, though government "spends" on consumers, this spending action does not affect the demand for goods. Only when the consumers spends on goods, the demand for goods is affected and counted as GDP. 

   There is also another quick way to make clear the concepts involved. The point is that you have to distinguish the term with quote...unquote ("...") and without. In GDP, "the government expenditure", or G, refers to certain specific expenditure. Not all spending originated from the government is G. In GDP, G refers to a situation: the government spends and buys some goods in the economy. Now, for consumption vouchers, it is the consumers spend and buy the goods, not the government buys them. Thus, the vouchers increase "private consumption" (C) in GDP, not G. Of course, the money is given by the government to the consumers. However, the money involved in the vouchers is only the government's expenditure (spent on the consumers), but not the "government expenditure" (spent on the economy).    

   In short, the confusion is that economics use specialized terminology but people often wants to interpret a term by its common usage. "Government expenditure" does not always equal a government's expenditure. Such a difference in usage often confuse economics students. For example, "short term" in economics is not the same as short term in daily life. The former is defined by the presence of some variables that are not changed within a period (e.g. price level or fixed cost). Also, "cost" in economics is not the same as cost in the business world. The former is about opportunity cost while the latter is an accounting concept. 

   This problem is common in economics learning, or social sciences in general, but not in natural sciences. When we study the society, we use some terms that are used already in the society, or the society may soon develop a habit of using a term in a way deviating from its original specialized meaning. This problem is less common in natural science because many science objects are not normally encountered in daily life. "Black holes" will not refer to things that will be encountered in daily life. But this situation is not true in economics or in social sciences.   

   Well, this may also explain why sometimes someone who has never learned the subject before may learn it more efficiently at the initial stage than someone who has some background knowledge. This is because the former has completely no idea and has to learn the definition of everything from scratch. They will not be "misled" by their pre-knowledge of something (as they have none). On the other hand, someone who has some background knowledge will every time interpret a term with their pre-knowledge, preventing them from effectively learning new things.  

   Perhaps we will ask: Why all these troubles? Why do we need a specialized terminology instead of following simply the daily-life usage of a term? The reason is that the daily-life usage of a term is too often ambiguous. Today there is only one meaning for it. Tomorrow it may be used to refer to something else. For a scientific discourse, concepts should be made precise or communications between scientists become ineffective while scientific progress will become mission impossible. 

   Then, why don't economists and other social scientists simply create a new term to refer to a specific meaning of everything? Why should they still use the same words to refer to something but deviate from the words' daily-life usage. In facts, they have created many new terms already. Economists (or other social scientists) have created specialized terms that have not been used elsewhere (such as opportunity cost). But creating too many these specialized term may also not be effective. Imagine that every concept you learn is labeled alpha, beta, or 12357 or ZX734. Perhaps it is easier to ask students to distinguish "short term" from short term than to create so many new terms. Furthermore, if the term is used to refer to something in a society, people may also someday start to use it in daily life and sooner or later its meaning will also change over time.  

   Hence, all we can do is perhaps to point out such a blind spot in economics learning. Hopefully mindfully learners will take care and then gradually adapt. This is indeed one mission of "hi, economics".