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Martin:
As well, that Basically I've managed to convince myself that there isn't a sensible mathematical definition of "real GDP" or the "price level" (also known as "GDP deflator")
is not a great intellectual achievment. GDP isn't well defined in infinitesimal small time intervals, or at least it will wiggle extremely around - e.g. on the day scale, GDP at night is much lower than in the morning. Therefore usually the smalles time unit in which GDP is published are months. This doesn't mean that you can't reasonably parametrise real GDP growth with analytical functions to make an economic theory.
The point is that as long as you have more than one product in your economy the (real gdp growth rate) and (inflation rate) are inexact differentials so they are path-dependent. Nominal gdp change is an exact differential.

If you have two collections of prices and volumes that are exactly the same 10 years apart, you have the same (nominal gdp change) but if the evolution of the economy took two sufficiently disparate paths over those 10 years you could have two very different (real gdp change) and (inflation).

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Fri Feb 27th, 2009 at 03:49:43 AM EST
[ Parent ]
If you have two collections of prices and volumes that are exactly the same 10 years apart, you have the same (nominal gdp change) but if the evolution of the economy took two sufficiently disparate paths over those 10 years you could have two very different (real gdp change) and (inflation).

Well, the change is still simply the difference. The accumulated real GDP can be different. But why would that mean that real GDP isn't properly defined. Your link to thermodynamic; in thermodynamics the values that are path dependent are as well properly defined. In the real world, the economy has taken one path.

And it is very clear, that Zimbabwe isn't the richest country in the world, despite for sure by far the largest nominal increase in GDP.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Fri Feb 27th, 2009 at 10:33:07 AM EST
[ Parent ]
All I'm saying is that nominal GDP is a state quantity but that real GDP change is a path quantity (and so is inflation). Maybe this is obvious, to you, but it wasn't to me, especially not from reading about economics.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Fri Feb 27th, 2009 at 10:40:38 AM EST
[ Parent ]
No, it wasn't clear to me.

But I don't see the relation with

there isn't a sensible mathematical definition of "real GDP" or the "price level"

from that observation.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Fri Feb 27th, 2009 at 10:45:39 AM EST
[ Parent ]
You can't get "real GDP" from just enumerating the goods and services traded and their prices at any one time. Thus, "real GDP" is not comparable across time or across countries.

Moreover, you can't get "real GDP change" from just enumerating the goods and services traded and their prices at the initial and final times, if these are far away enough to have encompass at least one business cycle.

So you have to fall back on "real GDP change" as a feature of a history of economic development.

By there isn't a sensible mathematical definition of "real GDP" or the "price level" I mean you can't meaningfully compare the "real GDP" or the "price level" between two points.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Fri Feb 27th, 2009 at 10:56:52 AM EST
[ Parent ]
Therefore you usually keep one variable fixed. E.g. the real GDP in prices of 2000. Or the inflation on this basket of products. This are both reasonable quantities.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Sat Feb 28th, 2009 at 09:35:44 PM EST
[ Parent ]

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