Fallacy of Composition: The Nominal, the Real and the Valueless

 

Amongst the rest of us, all “real variables” as named in Cambridge macroeconomics are surreal, if not outright deceptive.

 

7) Real Variables of Quantities

             We never consume apples and oranges for their own sake (M for mass), but we buy into their utilities (M∙U). Due to the difference in kind there is no way to add utilities directly of the two products. Owing to the sovereignty, blessedly, we have the common utility metric called “the unit of account” as printed on legal tender; if in the US, for instance, the $ sign is the unit (U) and the dollar bills are the legal tender (m∙U).

             Now with legal tender as the proxy of all different utilities (M∙U), we can add, indirectly notwithstanding, oranges and apples as traded in the respective market over multiple accounting microscopic periods; all the way to the national income accounting over the single macroscopic fiscal year (or quarter as the case may be).  

             [A passerby with or without a pan: Uh, could there be anything “marginal” all across the single economy all through the single year?]

              “Exogenous” to a kitchen, there is no real way whatsoever to add apples to oranges in “real quantities.” Undeterred, macroeconomists come up with the idea of “real variable,” that is, the “nominal variable” divided by the price level (P). For instance, the “real” GDP is imagined to be Y_N/ P (Y_N for GDP in the legal dollars, P in the “nominal” dollars); likewise, the “real” money stock is conceived to be M/ P.

             So good and so nice, except for that all real variables in Cambridge are by conception metric-free indexes. As all the dollar bills are equal before the law, we have (m∙U)/ (m∙U)= m⁰∙U⁰, or naked numeric. Ergo, one 30 trillion dollars of GDP divided by three dollars of the price level would be reborn as 10 trillion of blank rectangular little cuties of macroeconomists.

             Oh my, the poor aggregate households all across the real economy! They shall be inundated with so many of value-free tiny empty rectangular pieces of paper or arcane amalgam of linen and cotton.

             What a conceptive difference between the macro-economy and macroeconomics!

 

At the End of the Day. All in all, the rest of us would never forget that the only feasible comparison in a macrocosm is across nations or across the time. To be realistic and practicable for the sake particularly of “stability” or “growth” of the economy:

“It’s the percentage change, Your Excellency!

And that, all across (L^-1) the nation; all through (T^-1) the day, the quarter, the year, the “short run,” the “long run” and the perennial; no matter (M⁰) whether we are all alive, partially alive or “all dead.”

            Well, the day feels like Eternal to an ephemeral life. On the sidewalk of Cambridge, a certain passing-by Buddhist monk with a fame, “nominal” (U¹) or “real” (U⁰), would murmur:

“Human life is by creation ephemeral, Avalokitesvara Bodhisattva!”

觀世音菩薩 / 觀自在菩薩

                      The “Nominal” Dollar                          The “Real” Dollar