The challenge with nominal numbers is you want to put them in context. What context? OUR CONTEXT! It doesn’t do us a lot of good to know what our economy would be “worth” to someone from Year 0. Prices changed over time in part for nominal (monetary) reasons and in part for real reasons. To index using Year 0 prices assumes our quantity productivity increased and everything else that affects prices is a non-factor. That’s not as useful of a context. However, using recent prices solves that problem. It’s what the Year 0 economy would be “worth” to us given recent valuation.
The problem isn’t with RGDP, but the dual role of price—it reflects costs as well as valuation. It’s only a “problem” in the sense that it is complex. Goods whose prices drop for valuation reasons rightly get downweighted in GDP—we don’t want them anymore! Goods whose prices drop for cost reasons wrongly get downweighted in GDP, except oh wait, the supply curve shifts right so much that we produce a ton more to compensate. The brass example is an instance where the quantity growth didn’t keep up with the price drop, and that’s because the supply curve shifted faster than the demand curve, leading to a price drop in part due to valuation, which is back to a “good” downweighting. This is a feature, not a bug.
If you want further hedonic adjustments, you can do that in your choice or construction of price deflator. But let’s just say at some point you’re fitting your own valuation rather than an estimate of that of the general polity.
It doesn’t do us a lot of good to know what our economy would be “worth” to someone from Year 0.
I disagree with this specifically for the use-case of thinking about the future. If we want to know what the future will look like to us, and we want to figure that out via extrapolation, then we need to ask what the present would look like to past people.
You’re basically talking about net present value at that point, again viewing the present as the correct valuation context. Past people not needed. Maybe “training” our extrapolation paradigm on the past people problem could lead to a better approach, but I don’t see why a priori. You get more mismatch between the training and test set. And that’s not even what we are doing here with price-adjusting an aggregate.
The challenge with nominal numbers is you want to put them in context. What context? OUR CONTEXT! It doesn’t do us a lot of good to know what our economy would be “worth” to someone from Year 0. Prices changed over time in part for nominal (monetary) reasons and in part for real reasons. To index using Year 0 prices assumes our quantity productivity increased and everything else that affects prices is a non-factor. That’s not as useful of a context. However, using recent prices solves that problem. It’s what the Year 0 economy would be “worth” to us given recent valuation.
The problem isn’t with RGDP, but the dual role of price—it reflects costs as well as valuation. It’s only a “problem” in the sense that it is complex. Goods whose prices drop for valuation reasons rightly get downweighted in GDP—we don’t want them anymore! Goods whose prices drop for cost reasons wrongly get downweighted in GDP, except oh wait, the supply curve shifts right so much that we produce a ton more to compensate. The brass example is an instance where the quantity growth didn’t keep up with the price drop, and that’s because the supply curve shifted faster than the demand curve, leading to a price drop in part due to valuation, which is back to a “good” downweighting. This is a feature, not a bug.
If you want further hedonic adjustments, you can do that in your choice or construction of price deflator. But let’s just say at some point you’re fitting your own valuation rather than an estimate of that of the general polity.
I disagree with this specifically for the use-case of thinking about the future. If we want to know what the future will look like to us, and we want to figure that out via extrapolation, then we need to ask what the present would look like to past people.
You’re basically talking about net present value at that point, again viewing the present as the correct valuation context. Past people not needed. Maybe “training” our extrapolation paradigm on the past people problem could lead to a better approach, but I don’t see why a priori. You get more mismatch between the training and test set. And that’s not even what we are doing here with price-adjusting an aggregate.