The Genuine Emptiness of “Real Variables”

Classical economists including Irving Fisher defined the real interest rate to be the nominal rate after the inflation rate: or r= i- π. This makes sense (to a certain extent).

             Somehow, Cambridge macroeconomists call as “real variable” a monetary aggregate divided by the price level; for instance, the “real GDP” (Y) is to mean the monetary GDP over the price level (YN/ P). They claim the real GDP as such represents the GDP in “real quantities.” The same is for all the other macroeconomic aggregates such as C, I, G, X, M (for Imports), L, K, N and the like. Very fine, convenient and great, but for being totally empty!

             Emptiness No.1: There is no time dimension conceived howsoever. The GDP must represent an aggregate per annum, but the year in such a definition is never clear: the past, the coming or other 360 consecutive days? Seemingly, on the other hand, macroeconomists have a moment (of their choice) to represent the price level. Nice try, but how meaningful would it be the flow Y per annum divided by the stock P at a moment? The convenient way out as usual: “In the short run,” every period is to converge to a point in time. Well, those “exogenous” to Cambridge would “feel like a clown”: GDP as of this point in time?

             Emptiness No. 2: The definition itself represents an index at best. Let’s say that the GDP is 1,500 dollars and the price level is 3 dollars as for whatever period of time or as of whatever point in time. Then, the “real GDP” would be 500 free of metric. You know what? A naked number cannot represent anything “exogenous” to mathematics, or Cambridge for that matter: it is really and literally empty way far from “real” even for the macro-economy. As a matter of fact, the way to real variable is precisely how the index is defined

             When we index the price level to 1.00, the GDP will be indexed to 500. By construct, any index number in itself does not have any substance at all. The purpose of devising an index is to calculate percentage gap or percentage change between two numbers from the reality. For instance, the raison d'etre of DJIA is for comparison in percentage terms among two or more numbers.

             Emptiness No. 3: Macroeconomists say that they are mainly concerned about “real quantities.” On top of the emptiness as above, the saying is directly against Adam Smith’s prescience that the only purpose of production is consumption. “Real variables,” what do you mean by it? Are you serious?

             Probably, you in the private capacity would never buy apples and oranges in quantities regardless of their value of utilities. If ever, why not endlessly consume apples of domestic production?  

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