Don’t let Scott Sumner tell you otherwise. The meat from my latest Mises CA post:
Regardless of the usefulness of (nominal) GDP as an economic statistic, Scott Sumner (and perhaps some of his fellow Market Monetarists) are incorrect when they lead their readers to believe that this is a “raw” empirical fact, which requires no conceptual judgment calls by the economist (the way that real GDP requires an adjustment for the “price level”). In the real world, you could give two teams of economists the same data on nominal expenditures in an economy, and they would come up with different answers for “nominal GDP” if they weren’t allowed to communicate with each other. That’s because the dividing line between “final” and “intermediate” goods and services is somewhat arbitrary.
For example, in a textbook treatment they would say that if a baker buys flour that is completely turned into bread and sold to his customers, then the expenditure on the flour doesn’t count in GDP. But if that same baker buys a new oven, then the expenditure counts in GDP as part of investment. But what about the fact that a fraction of the oven depreciates during the year, and effectively “turns into” the loaves of bread, in terms of accounting? This is the distinction between fixed and working capital, but the proper way to apply it in the real world is somewhat arbitrary. I am quite sure that the average fan of Market Monetarism has not thought through the subtleties involved.
Note that this complication affects the equation of exchange, too. People routinely thinkMV=PQ involves multiplying the number of dollars by the amount of times a dollar bill turns over, on average. But if you want the “Q” on the right hand side to refer to GDP–which economists usually mean–then you have to talk about the velocity regarding a final good or service. In other words, “How many times does the average dollar bill change hands, in a transaction that involves a final good or service?” That makes “V” much weirder than it already is, as a variable to be used in a discipline that ostensibly embraces methodological individualism rather than mindless aggregates.