Monday, November 10, 2008

Flaws of GDP, Factors of Inflation, and Velocity of Money

What the GDP measures

GDP (Gross Domestic Production) measures the total money used to purchase newly produced, finished goods during a year. The GDP, however, does not measure the money used to purchase used-goods.

A commonly cited refutation of GDP involves the breaking window fallacy. Breaking and repairing windows increase expenditure, which increase GDP, even it harms individual. Breaking windows forces an individual's money to spend repairing instead of using the opportunity costs things that the individual actually desire.

GDP, additionally, does not measure economic distribution. Some individuals may have a poor standard of living or also unemployed, even if the aggregate GDP compares greater than other nations. This seems true for highly corporate-capitalist economies, in which the CEOs of the corporations steals almost all of the income from others.

GDP, also does not measure the underground economy.

A more important refutation deals with the GDP measure on production without any consumption. However, production and consumption overlap, so the GDP has to judge whether production or consumption occured in its fuzzy circumstances. Volunteer work, increases both production and consumption, because the individual find it psychically pleasing to do this work. Some individuals may enjoy producing open source software, so they consider producing open source software as also consumption. For instance, individuals may use open source software as consumption since he learns how to code software better by programming open source software, but open source software has a side-effect of production. In order to measure production, the state has to arbitrarily define which products constitute production, and which products do not. But as some activities fits in between production and consumption and does not have a distinction, the state can have the power to manipulate measurement to artificially increase GDP by defining a wider variety of products as productive processes.

Taxation, may even increase GDP, since individuals must work harder to pay these taxes. If we subtract government spending from the GDPs of the Nordic states, these GDPs will literally halve.

The mainstream media commonly speaks propaganda that deals with ``growth rate" as fast or slow. We cannot judge whether an economy grows fast or slow only by its ``growth rate." Underdeveloped economies have a potentially much higher growth rate than more developed economies. As the amount of technology stays the same level in all economies, the underdeveloped economy grow faster by accumulating technology. The underdeveloped economy would grow fast not because its economy ``grows," but its economy catching-up from previous state inhibition of growth.

The growth rate of the underdeveloped economy would eventually decrease as its economy catches up with the developed economy, due to diminishing returns.

Cultural influences to GDP

Differences in culture, knowlege, and preferences of individuals may have a greater impact on GDP level. Individual ignorance, religion, and other cultural preferences like the birth rate may have a greater impact on GDP than economic.

On health care issues, the Western individual may eat much processed food, which may increase the prevelance of certain diseases. These, however, raises health care spending, which, in turn, increases overall GDP. Should individuals eat healthy, the overall GDP would decrease, as the level of health care expenditure decreases.

The pharmeceutical and psychiatry industries may increase the GDP by a lot. These industries defraud its consumers to take expensive medication, which have no beneficial use to them. As many individuals spend a great deal of money on medication, the GDP may increase by much.

Cultural traditions may also impact GDP. Holiday tranditions such as Christmas, may have a larger impact on individual spending, and may also increase GDP. Spending time in churches may increase GDP due to greater spending. If the population does not believe in religion, the GDP would decrease due to lesser consumption.

We should use birth rate as another factor. The greater the birth rate increase, the lower the per capital GDP, even if the aggregate GDP did not change. As the state records the children born to mothers in a census, the higher the birth rate, the greater the population, which would make the per capita GDP decrease.

Other factors of price increases

An increase in the price of oil, in fact, may increase the culminative prices of all goods, even in the case in which the total money supply stays constant.

The oil price increases the opportunity costs of oil consumption, which produces a net deficit of oil utilization, and also the the underutilization higher-order machinery, such as cars, that consumes oil. This underutilization of goods and services that uses oil, due to increased costs, would result in a net decrease in gross production. Since the proportion of gross production compared to money supply decreases (or the velocity of money), the overpricing of oil would result in apparent price increases through all goods and services in the economy.

We should take caution not to interpret the above paragraph as the Keynesian idea of ``cost push inflation." Their theory sets the false assumption that even if gross production stays constant, the culminative prices will increase. Our theory, however, depends on the decreases in the gross production relating to oil.

In order to demonstrate more fully why decreases in gross production would cause price increases, let us set a clearer example: If it suddenly costs several times more to produce all kinds of goods, such as food, clothing, and services, the gross production of the economy decreases. If the money supply stays constant, the ratio of goods over the supply of money would decrease, hence would result in culminative price increases.

Our former example sets an increase in the price of oil as the factor of raising the costs of production of several goods in the economy. An increase in oil would increase transportation costs, which would, in turn, raise the costs of food redistribution, and also many other goods transported throughout the economy.

This idea elaborated in the above paragraph does not contrast Austrian economics. In fact, Austrian economists well know that a decrease in GDP, while the supply of money stays constant, will raise the prices throughout the economy. We just modified this idea with the assumption that an increase in oil price results in a decrease in GDP.

But the reverse can happen too---an increase in oil prices can also increase GDP. If the demand of oil does not change much according to the prices of oil, also known as the idea of ``low elasticity of demand," then it may result in an increase in GDP, and hence decreases in prices throughout the economy.

The velocity of money

The strength of the currency, in addition to gross production, also depends on its velocity. We define the velocity of money as the total flow of money divided by its population size in a specified period of time. Different definitions exist for the velocity of money, and we should not use other statistics for the velocity of money. Other sources define the ``velocity of money" differently from us, such as the GDP divided by money supply.

We should not, however, equate the velocity of money as the gross production divided by money supply. These two unrelated units do not correlate with each other. The velocity of money may increase without any increase in GDP. For example, the velocity of money increases if individuals sell more used goods, which the GDP does not take account. An increase in the velocity of money would cause price decreases in the economy, since the demand of money increase relative to the demand of goods. A fortiori, selling more used goods, would result in a net decrease of prices in the economy, since it would increase the velocity of money while the GDP stays constant.

The velocity of money, may influence the general price level. Assume that all of the economic production halted. This causes the GDP to equal zero. But individuals would still use money to exchange used goods. This encourages the demand of money, which make the currency have a ``value" caused by a demand of used goods.

The velocity of money, however, may have no effect on the general price level. Suppose two people, Alice and Bob, prepare to deal with transactions. Alice possesses 10 ounces of gold. Bob possesses a tractor also worth 10 ounces of gold. Imagine that Alice wanted to purchase Bob's tractor for 10 ounces of gold. However, after Alice purchased it, Bob wants to reclaim his tractor by purchasing his tractor back from Alice. Now, as Alice has her 10 ounces of gold and Bob has his tractor back, this situation remains the same as the original case. However, the velocity of money has just increased by 20 ounces of gold, since Alice and Bob transferred gold twice. If Bob sold his tractor and repurchased it again, for the second time, the velocity of money would increase by 40 ounces of gold, even if both Alice and Bob now possess the same stuff as in the beginning. New imagine that Alice and Bob did the same transaction for the third, fourth, and up to an infinite number of times. They would both still, would have the same possessions, but the velocity of money has just increased tremendously. This shows that, even if the velocity of money increased multiple times, it may still have no influence other prices. Therefore, we should not consider that the velocity of money only influences the general price level.

So as we have shown above, in certain cases, the velocity do have an effect on the general price level, but in other cases, it does not have any effect at all. So, specifically, what influences the general price level besides inflation and GDP?

Answer: The proportion of money used for used-goods compared to the proportion of money used in new goods. We will show two examples of how the proportion of money used in used-goods would cause a change in the general price level (or the strength of the currency) without any change in GDP or money supply. We will show that ``recessions" and taxation can also cause an impact on the strength of the currency.

During a ``recession," the prices in the economy may decrease depite the fact that the money supply simutaneously increases. We explain this by citing the massive amounts of business liquidations during a ``recession." As liquidations involve selling business assets and thus increase the velocity of money, an increased amount of liquidation would make the currency appear stronger during a ``recession."

Many factors that influences GDP also influence the strength of the currency. High taxes, may also strenghten the currency since the GDP includes government spending as a component. An increase in savings may strengthen the currency since savings lowers the velocity of money.

The growing parasite

According to various Internet statistics, these suggest that the rate of monetary expansion in the United States exceed over 15% per year. Many observers, however, see the rate of monetary expansion as much lower.

Many countries measure its GDP according to the international dollar. International organizations set the current international dollar as equivalent to one Federal Reserve note. As the rate of monetary expansion exceeds over 15% per year, the international dollar, equivalently, loses its strength about 87% per year. Because many countries measure their GDP using the international dollar that expands 15% per year, their nominal GDPs should also increase by 15% per year, to retain a constant real GDP.

However, as we see it, the nominal GDPs in most countries do not, however, increase by 15% per year. This signifies that their GDP has decreased over the years.

To give a summary to which nations have a increasing or decreasing GDP, we test it by using this: every nation that has a nominal GDP ``growth" rate less than 15% has a decreasing GDP.

The parasite has gained tremendous momentum of leeching off an increasing 15% of income from working man annually, thus demonstrates the impossibility of reversing that trend by working within the system.

A Primer on GDP

As Kevin Carson argued, GDP includes the cost of repairing the windows.

GDP is the measure of the output of a country. The equation for GDP is: C + I + G + (X-M)

The "C" in the equation also includes the costs of repairing a broken window. In order to have the money to pay, individuals have to work harder.

The "I" also includes malinvestment from expansion.

GDP includes the cost of government theft: taxation. GDP is the income of individuals before tax. To exclude the theft that increases the GDP, the "G" in the equation must be removed. The government spending should be substracted because individuals work harder to compensate the theft by government.

GDP increases if exports increase, and decrease if imports increase. This should be reversed. Individuals would have greater purchasing power to buy the imports if imports exceed exports. So (X-M) should be turned to (M-X).

FSK uses the median household income to estimate the GDP. He should have left out the government spending portion of the GDP and reverse the exports and imports. Besides his fallacy of using the inaccurate GDP to measure the economy, his use of "median annual income" is flawed because it is actually the median household income.

The "median household income" is inaccurate because the average number of individuals per household has became smaller.

For example, there were 108,209 households in 2006 and 94,312 households in 1900. This is an increase of 15%.

However, the population has increased from 248,709,873 to 281,421,906, which is 13.1%.

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