Is GDP useless when measuring production?

[tcostel]

I have been reading Hazlitt and he makes a very interesting argument about GDP: that it cannot rise unless their is inflation. Even Real GDP would not work. Real GDP attempts to take inflation out of the equation (meaning the monetary supply would be static). But if the monetary supply truly was static, it would literally be impossible for the GDP dollar amount to increase. Real GDP must still take into account inflation.

So what can GDP (real or not) really be used for? Are there any actual measures of production? Respond with any arguments about GDP.

[DD5]

Can you please provide the link/reference to this particular argument by Hazlitt?

Real GDP, of course treats inflation as a rise in prices in absolute terms. Eliminate the nominal rise in prices due to monetary policy and you allegdly have the increase in monetary spending only due to an increase in the supply of goods.

[Smiling_Dave]

Kel Kelly wrote a great article about this. http://mises.org/daily/4654

Yes, please tell us where Hazlitt wrote this.

[tcostel]

But if there is an increase in supply, shouldn’t prices decrease? Even if there was a greater demand and prices rose and people still bought the same amount of the good with the increased supply, they would have the same amount of money to spend, causing them to spend less elsewhere.

If an economy spends 1 trillion dollars and then the next year spends 2 trillion, where did the extra 1 trillion of money supply come from if not inflation?

I made a mistake about reference Hazlitt, the argument came from Kel Kelly’s article here:

Mises Daily | Mises Institute

I was reading Hazlitt at the same time, so I mixed up who was saying what. Here is a quote from the article:

Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).

This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.

Edit: Smiling Dave, you figured out my mistake right as I was typing the above, and that is the article I am talking about.

[Autodidact]

GDP is not entirely useless, but it is heavily distorted and only tangentially related. Also, it is not quite possible to measure an ‘increase in production’ since these are ultimately subjective things.

[tcostel]

Would a better indicator of economic performance be real median income?

[Autodidact]

Would a better indicator of economic performance be real wages?

I believe that a person not looking for pre-conceived results (as the government propagandists are) could construct a list of plausibly relevant products and compare them to wages, yes. This would be a good indicator.

The fact of the matter is that these issues of econometric historical analysis can never be boiled down to a single number or scale; as investors using these methods will tell you you need a carefully selected and vetted collection of such metrics in order to get a realistic perspective; and in all cases it is reliant on verstehen to make sense of the numbers, and to make sure the inputs chosen (and methods of sampling) are not too distortive.

[Caley_McKibbin]

If an economy spends 1 trillion dollars and then the next year spends 2 trillion, where did the extra 1 trillion of money supply come from if not inflation?

It comes from the fractional banking system lending more.

[tcostel]

It comes from the fractional banking system lending more.

Isn’t that only possible if there is inflation? It is to my understanding that by lending money that they do not have, banks are increasing the money supply.

[Autolykos]

@Caley McKibbin

If an economy spends 1 trillion dollars and then the next year spends 2 trillion, where did the extra 1 trillion of money supply come from if not inflation?

It comes from the fractional banking system lending more.

Wait, isn’t that a form of inflation?

[Caley_McKibbin]

I don’t understand the confusion. The banks created the extra 1 trillion. I.e., they inflated.