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Question about GDP

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JH2011 posted on Tue, Jan 3 2012 2:23 PM

After reading this article by Kel Kelly, I am thoroughly convinced that:

1) all prices cannot rise at the same time unless the money supply increases or the production of goods and services decreases in a given economy and,

2) therefore, the $ value of GDP cannot increase unless the supply of $ increases and,

3) the sign of a healthy and productive society is one where the money supply remains constant, and goods and services increase, which results in prices constantly decreasing over time.

But if we view GDP as a useless measure for economic growth (and I define economic growth asas "the production of goods and servies") what data can we refer to in order to measure what is being produced by a given country or economy?

Does anyone suggest further readings on GDP?  Thanks for any help.

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You're so on the right track.

Check here for a brief post on this.  There's also a couple of links to articles (another by Kel Kelly) that go into it.

Also there's this:




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Here is an example of other ways people have tried to quantify 'growth'...
Do Real Output and Real Wage Measures Capture Reality? The History of Lighting Suggests Not
by WD Nordhaus - 1994

Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid

Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring

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The two articles (Frank Shostak and Kel Kelly) and the video make a lot of sense to me.  I really like the Frank Shostak article.  They are giving me further foundation to believe that GDP and price indices which attempt to make measurements with accuracy to a decimal place are meaningless. 

I particularly like when Shostak says:

"One is tempted to ask, why it is necessary to know the growth of the so-called 'economy'?  What purpose can this type of information serve? In a free unhampered economy, this type of information would be of little use to entrepreneurs. The only indicator that any entrepreneur relies upon is profit and loss. How can the information that the so-called 'economy' grew by 4 percent in a particular period help an entrepreneur make profit? 

What an entrepreneur requires is not general information but rather specific information regarding the demand for his specific product, or products. The entrepreneur himself has to establish his own network of information concerning a particular venture.

Things are quite different, however, when the government and the central bank tamper with businesses. Under these conditions, no businessman can ignore the GDP statistic since the government and the central bank react to this statistic by means of fiscal and monetary policies. Likewise, participants in financial markets closely follow the GDP statistic in order to assess the likely responses of the central bank."

I think that all makes sense.  But I know from first hand experience that participants in the financial markets follow the real GDP statistic for more than just an indication of central bank and federal government policy.  As I read a few 2012 outlook pieces from large financial firms, they focus entirely on the real GDP statistic as a measure for how a particular country's "economy" is growing.  They use it as the primary indicator for how well-off the people in a particular country are.  

My thinking is now as follows:

1.  The real measure of material wealth of a group of people is, by definition, a function of the amount of goods and services.

2.  Because adding quantities of different goods is not possible, the money value of GDP is used as a measure of material wealth.  But the money value of GDP is not a measure of material wealth because nominal GDP could not increase unless there is an increase in the money supply.  And real GDP cannot be calculated with any sense of accuracy because price deflators cannot be calculated with any sense of accuracy. 

An example that helps me understand the inaccuracy in a price deflator is to look at one particular product, chainsaws, for example.  Let's say that 1 chainsaw costs $100 on day 1 and can cut down 1 tree per day.  A year later, technological changes caused chainsaws to become smaller and allow for 1 chainsaw to cut down 0.5 trees per day and each costs $50.  It is easily seen that the cost of cutting down one tree has not changed.  It is still $100.  The chainsaw itself is what changed.  Would we now say that chainsaws are half as expensive?  Of course we would not.  The cost to someone who wants to cut down 1 trees is the same - $100.  But the cost of 1 chainsaw is half of what it was previously.  I admit I do not know how price deflators are currently calculated, but how could any group of people possibly investigate and account for every product change over time?  Who is out there testing that one chainsaw has the same productive capacity between different periods of measurement.  And further, this example only dealt with a change in the type of chainsaw with the same overall productivity per dollar spent.  We didn't even account for what would happen if the chainsaw became more productive.  Let's say that 1 chainsaw cost $100 and can cut down 1 tree per day.  And a year later, 1 chainsaw still costs $100 but it can cut down 2 trees per day.  In this example, chainsaws became half as costly.  But unless someone is out there testing the productivity of chainsaws, it would appear that the price of chainsaws has remained the same.  So again I would ask, who is out there testing the productivity of every product in a particular country?  And further, this last example shows that technological advances over time should be the basis for HUGE decreases in the price of products.  The fact that we constantly witness technological advances yet still see significant increases in prices the long term is absurd. 

3.  If real GDP is not a measure of material wealth, its only use is to assess the likely responses of the central bank and federal government.

Unfortunately, all of that doesn't change the fact that well-known financial firms will continue to reference real GDP as the be-all end-all statistic for measuring economic well-being, and my conversations with subscribers to this view will only be more difficult.

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JH2011 replied on Wed, Jan 4 2012 12:08 PM

Seeing what has been posted here, I believe we are in agreement that real GDP is a very poor and inaccurate measure for material wealth, i.e. the production of goods and services. 

But do we leave it by saying that there is no measure for a nation's income or production of goods and services?  Do we simply say it's not possible to measure accurately and any attempt is fruitless?


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OH COME on JH2011 . Macroeconomic indicators are important for individuals. Models are important in the practical world, maybe it works differently in the purely theoretical and aprioritic mind of die hard misesians though. Would you prefer to live in canada or spain if shtf in your home country? Thats right canada, and you decide so based on the macroeconomic situation. both are politically stable and have different specifics in industries but when you look at aggregate growth and indicators it is clear where the golden egg is laid.

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I'm having trouble seeing how your response is relevant to anything that we previously said in this post.

We are addressing the issue that real GDP does not mean the same thing as material wealth. 

You referenced "macroeconomic indicators" and "aggregate growth and indicators."  The point of this post is to explain what is meant by terms such as these, rather than to use them as if they have a specific, calculable meaning, but without defining the meaning or methodology for calculating them.

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I will free ride on this topic to talk about a related project of mine. Hope you don't mind :) Then again, my english is crap, please, don't kill yourself.
I was thinking about doing my project on economics using a modified “Fishermen parable” as a model to understand the meaning and shortcomings of a GDP-like revenue aggregator.  I shortly explain the model bellow. If anybody knows any research or amateur paper attempting something similar I would be very grateful. And also if any one wants to make suggestions and/or corrections, feel free to contribute.

My primary goal is to use this model to orient theoretical analysis at first, with qualitative and quantitative results. My unrealistic long term goal is to code all this in to a an agent simulator such as Netlogo and see what happens.

The model:

Perhaps to understand what an aggregator like GDP means we may wish
to apply it to a very simple economy operating under autarky. We propose the very popular and useful “Fishermen parable” here as a model, with a few distinctions that will show useful for our treatment.

Consider an island inhabited by a population of very simple men.
There are only two storable commodities that can be produced by labour: fish and fruits.
Fortunately, fresh water is not a scarce resource.
Men like having fruit and fish to eat, but dislike labouring and would prefer spending their hours going about their leisure activities. They also like to gauge their perceived risk of starvation by stockpiling food resources. Not all men are equal regarding the order of those preferences. Some may like berries more than fish, others the opposite. Some may hate working much more than the other fellow islanders. Some may be very carefree about their stocks, others may be more paranoid.

The island operates within full private property rules. There are no complex work relationships. Everyone is an autonomous worker and each man is entitled to what he produces as a fisherman or collector. He can store any surplus production in his private stock. There are no thieves or brutes of any sort.

They also can trade freely among them. There is only one rule. Due to their primitive religious beliefs, they must employ a specific means of exchange: fossil shells. Those shells have been circulating in the economy for a while. They cannot be found in nature anymore. They are very portable, similar to each other, quantifiable, and people have an aesthetic appreciation for them. They serve very well as money.

So every man has a private stock of fish, fruits and shell.

The above rule applies only to the trading of fish and berries, not to any service. Services are either given away for free or traded for other services. No fish, berry or shell can be used to purchase a service.

Other than trading, they don’t engage in complex contractual arrangement. They don’t borrow or lend because they don’t know what credit means, they don’t sell forwards or futures, they don’t short sell, yada yada yada.

They only trade on spot, and they use those damn shells for that.

Production of the two commodities is determined by the amount of hours worked either fishing or collecting. (Perhaps later on we could add interesting effects such as experience acquisition, as a bonus to production proportional to the hours historically worked. Also random environmental effects could play a role in the game.)

Each individual adjust a rate of consumption of his private stock of berries and fish. If any stock goes down to zero the individual dies of starvation. He does not want to die, more than anything else.

So each individual must balance a private stock of berries, fish and shells used for trade.

Given their individual utility functions (preferences order), this shall create a market and a price system. This part is of course tricky, because realistic utility functions are very complicated even in a simplified scenario.

The idea is to create a GDP-like aggregator measured in shells that account for the total consumption of berries, fish and leisure, at their spot market price (how to specify the leisure market price without sallaries seems like a serious problem. Maybe to consider the rent of time given by he’s marginal production of berries/fish, I sincerely don’t know here...).   

Than one could see how the money supply plays an important role.
For example, if stuff is abundant with respect to money, their price should fall, but also more transactions are going to take place because people consume more now. These are two compensating effects.

There are also difficulties that arise if we are to think that people anticipate market behaviors, but I think that’s not necessary to be considered at first.

This is of course just a very unpolished sketch of what I intend to do.
I think its still very complex to be tractable, but I don’t superflous elements that can be cut-off easily.
Any help would be much appreciated :)
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But what about real and nominal GDP growth then? It can't be the same

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A point I would like to add to this discussion:

Strictly speaking an increase in the supply of money isn't the only way GDP rises.  Since GDP is essentially a yearly tally of all incomes in a given country it can also rise if the number of transactions within that given time period increases.  Put another way, GDP rises if the "turnover" of the monetary base increases.  This is measured as the velocity of money, or GDP / Money supply.

This isn't to invalidate Kel Kelly's analysis, just adds another dimension and, in my opinion, allows us to deduce more valuable information from the GDP statistic.  Take the below graph for instance:

Notice how, since at least the 80's there has not been a sustained expansion of the velocity of money yet the GDP statistic continues to grow.  Also, not only is MV not rising, it has been in a persistent downward trend since the Fed began tracking MZM.  This indicates to me that, while GDP can and does rise without monetary expansion, it's "growth" is becoming increasingly supported by the growth of the monetary base.  Basically, the Keynesian virtuous cycle has yet to materialize despite all the pump priming and animal spirit stoking.

"...I feel, for instance, that I have the right to do anything I please. But, if I do something you don't like, I think you have the right to kill me." -George Carlin
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+1 ThreeTrees

GDP can rise due to increased "velocity of money" - what is absolutely not clear to me at all is how increases in the velocity of money are necessarily a good thing, a tenet of faith of the orthodoxy. Inefficiently small transactions could be a sign of economic discoordination, for example.

Nevertheless, the secular rise of GDP is primarily due to expansion of the money supply. It bears the same exponential shape as the rise in all other prices and indices... and the size the money supply.

Clayton -
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