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Does GDP measure growth in the economy or simply growth in the money supply?

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  • Jacky Mallett
  • Charles Keen

Abstract

Gross Domestic Product(GDP) is a widely used measurement of economic growth representing the market value of all final goods and services produced by a country within a given time. In this paper we question the assumption that GDP measures production, and suggest that in reality it merely captures changes in the rate of expansion of the money supply used to measure the price data it is derived from. We first review the Quantity Theory of Money $MV=PT$, and show that the Velocity of Circulation of Money(V) does not affect the price level as claimed, as it is also a factor of the quantity of transactions(T). It then follows directly that attempts to measure total production from any form of price data as the GDP measurement does, will necessarily be confounded by the inverse relationship between prices and the quantity of production, which requires that as the total quantity of production increases, prices will drop. Finally, in support of this claim we present an empirical analysis of the GDP of nine countries and one currency union, showing that when normalized for money supply growth GDP measures have been uniformly shrinking over the last 20 years, and discuss the possible reasons for this behaviour.

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Paper provided by arXiv.org in its series Papers with number 1208.0642.

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Date of creation: Aug 2012
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Handle: RePEc:arx:papers:1208.0642

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  1. Miquel Faig & Belén Jerez, 2007. "Precautionary Balances and the Velocity of Circulation of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 843-873, 06.
  2. Ant�nio Afonso & Ricardo M. Sousa, 2012. "The macroeconomic effects of fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 44(34), pages 4439-4454, December.
  3. Mendizabal, Hugo Rodriguez, 2006. "The Behavior of Money Velocity in High and Low Inflation Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 209-228, February.
  4. J. Steven Landefeld & Eugene P. Seskin & Barbara M. Fraumeni, 2008. "Taking the Pulse of the Economy: Measuring GDP," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 193-216, Spring.
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