Long-time readers know that I am not a fan of the Market Monetarist approach to monetary policy, in which central banks are supposed to target a steadily growing level for nominal Gross Domestic Product (NGDP). However, in this post I am not going to explain my dissatisfaction with the overall policy. Instead, I want to point out that – contrary to the claims of Market Monetarists – there is no virtue in NGDP being a brute fact that can be easily measured, the way (for example) we can go measure the price of apples. NGDP is itself an arbitrary concept invented by economists. In particular, it is NOT equal to ‘total spending’ even though Market Monetarists often use the terms interchangeably.
Suppose the following transactions are the only ones that occur in an economy in a year:
March: Farmers sell 1 million units of wheat at $1 per unit to millers.
June: Millers sell 1 million containers of flour at $2 per container to bakers.
September: Bakers sell 1 million wholesale loaves of bread at $3 per loaf to grocery stores.
December: Grocery stores sell 1 million loaves of bread at $4 per loaf to consumers.
Obviously the above scenario is ridiculous in many respects, but no matter what I do the story will be unrealistic, so I decided to make the math nice and simple.
This post was published at Mises Canada on November 16th, 2014.
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