Insubstantiality of Macroeconomic Indicators

Suppose a representative product (in mass) whose utility (in value) is exchangeable for the purchasing power of the piece of paper (75% cotton 25% linen, to be precise) with the face of George Washington in the front. As a matter of fact, this is the way we, if in the US, index the representative mass-cum-value, or “rep” hereinafter, to the one-dollar bill. Then, one (1) $5 supra-orange is comparable to five (5) reps; one $3 meta-apple is equivalent to three (3) reps.

             In the meantime, incidentally, the otherwise-useless rectangular paper becomes the legal tender to play the function of economy-wide medium of exchange. It is of course the portrait of George Washington (together with two signatures) that transforms one into the other: or the legal tender becomes the medium of exchange.

             With the above said, by way of accounting for representative products-cum-value, we can aggregate in dollar bills the economy-wide utilities in the fiscal year from all the final goods and services. Let us name the sum total as the “aggregate domestic welfare (ADW).” Here, it may be noted that ADW does not include the monetary value of fresh-constructed assets, or the gross domestic investment in money (P∙I, where P for price level, I for GDI).*

             Now, let us move to Euroland while assuming the exchange ratio to be two dollars per euro ($2/€). The welfare from the same package of three oranges and five apples as above would be 15 euros and 15 European reps. Therein we find the real quantity to be 15. 

             We know that in both economies the orange is 5/3 times more valuable than the apple. However, no one of us would insist that the package in one economy be more valuable than in the other. Clearly, we define the welfare numeraire at our convenience respectively in the US, Euroland or anywhere else. As the metric is arbitrary, so must macroeconomic indicators in money be.

             Put the trouble of arbitrariness in a slight different way, the currency unit is a type of index with a value metric. Consequently, we might also focus on the percentage change in, instead of the level of, the monetary ADW. Even the “monetary GDP” does not have any meaning by and in itself. It’s the percentage gap or change that matter, as far as macroeconomic indicators are concerned.

             Getting back to the blank canvas as usual, would the “two dollar per apple” be cheap or dear? How so? The true answer between you and me: “It all depends.”

 

*Note: The product for consumption (C for this year only) and the asset for investment (I for many years yet to come) are different species and are not supposed to be added up if outside of macroeconomics.