Inflation Is Confusing: Let’s Target Nominal Expenditure

To compute "Real GDP" one has to adjust nominal GDP by a measure of inflation. Different measures of inflation provide different answers. Doug Short at Advisor Perspectives has an excellent column following every GDP release showing what the reported GDP would look like with various deflators. His latest report is Will the "Real" GDP Please Stand Up? (The Deflator Makes Big a Difference)

Today we are fortunate to have a guest contribution by Sam Williamson, Research Professor at University of Illinois, Chicago, and President of Measuring Worth. For the last 62 years the United Kingdom’s real GDP has grown at a rate of 2.43%. Per capita real GDP grew at 2.06% from £6,428 in 1948 to £22,410 in 2010. Both of these numbers are “measured” in 2009 prices.

Ivan Kitov submits:This is an instructive story about the metrology of macroeconomic measurements. From the point of view of hard sciences, the economics profession does a great counterproductive work in order to hide actual links between macroeconomics variables.

David Beckworth submits: A key objective of QE2 is to raise nominal spending. Given sticky prices and excess economic capacity, this increase in nominal spending would boost the real economy. Now the way QE2 can raise nominal spending is by raising inflation expectations. Higher inflation expectations creates the incentive for banks, firms, and households sitting on money to start spending it. In fact, the key problem facing the U.S.

Back in January, Jeffry Frieden and I argued for higher inflation, conditioned on macro conditions, in a Foreign Policy article.

By David Beckworth: This is a question that observers, particularly those who are skeptical of the aggregate demand-shortfall view, often raise. Ryan Avent and Paul Krugman both answer this question in recent posts. Here is Avent:

The Advance Estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, and below most mainstream media estimates of 2.5%. However, my friend BC notes .... The GDP deflator is reported to have averaged 1.2% annualized in the past 2 qtrs. Had the trend rate from '11 persisted, the deflator would have subtracted 2.6% annualized from real GDP, resulting in a 2-qtr. growth of real GDP of 0%.  ECRI's Achuthan would appear correct that a recession were imminent instead of looking like a dummy.

By Doug Short: How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.