From Cambridge to Eternity: “It’s the Percentage Change”

 

If any of us gives us any number, we can prove that the number might represent the US GDP of a certain year in an imaginary currency unit, say, bancor.

          Suppose that the number given happen to be 123,456,789,000 and the US GDP of 2023 be 27.4 trillion dollars. First, we revise the given number to 123 billion bancors because the digits smaller than the “margin of error,” which is innate to the nation-wide survey for an estimation of GDP, have no merit at all to quote. Further suppose that the exchange rate be 223 dollars per bancor. Then, the GDP 123 billion bancors equals to 27.4 trillion dollars. Q.E.D.

The Point. The dollar is no less arbitrary than the bancor is imaginary. Therefore, the true meaning to our life comes from relativity either in the dollar or in the bancor; that is, either interspatial or intertemporal comparison, which in turn is for the purpose of a choice. Approximately saying, the market of economics is about the former, wherein the currency unit is sovereign. In other words, the market price is the legitimate metric of value, academically as we as legally. For instance, the utility of the widget vs. the gadget as “revealed’ in the market can be compared with the monetary price. 

            On the contrary, as for the macro-economy where there is nothing for anything to be compared to, a variation across scenarios or a change over the time shall be in terms of percentage; namely, the percentage gap or the percentage change.

International comparison. The “scenario plan,” the IS-LM and the AS-AD included, is not much meaningful exogenous to entertainment markets. Particularly in economics, the economy-wide “aggregate” can be meaningful when compared internationally. Now suppose two economies with GDP of 27.4 trillion dollars and with 123 million bancors. The comparative size of the two economies depends on the exchange rate. Here, the comparison must be again in terms of the percentage so as to remove the effect of exchange rate on the absolute size of the gap.

The Gross National Income. All that we, who are no trillionaire, can imagine of GNI is that the income of all is not comparable to the income of each. As a result, the truly meaningful use of GNI is in calculation of over-time percentage changes, usually referred to in % per annum, and that is for us all.

 

The Price Level. Oh, that’s an index which is created for the sake of comparison almost always over the time. Yes, the rest of us mean “the percent change per annum of the price level.” Sounds familiar? Oui, déjà vu. C’est le taux d'inflation. 

The Real GDP. Raison d'etre of the index of indexes is for the calculation of its percentage change per annum.

The Real Variables. Ditto.

The AS-AD Model. Quo Vadis?