Marcus Nunes quotes David Beckworth, who quotes Mark Sadowski, who says:
RGDP is an artificial concept requiring that we estimate an index of the aggregate price level.
Beckworth links back to Sumner, where George Selgin quotes the same words of Sadowski, and expands the thought:
The occasional, if tacit, treatment of NGDP as a value that is “derived” by taking the product of two directly observable magnitudes, real output and the price level, is as mischievous as it is wrong.
I'm not sure about the mischief. But it is definitely wrong.
I'm sure he means no harm. But if I were to respond to Nick Rowe's Simple thoughts on NGDP = RGDP x P, I would begin by quoting him:
1. NGDP = RGDP x P. In words: nominal GDP = real GDP times the GDP deflator (which is one way to measure the price level).
What Nick is saying in words, it seems to me, is that Nominal GDP is calculated from Real GDP and the price level. But that is wrong, as Sadowski and Selgin assert.
In every computer language I ever used, the equal sign assigns the value on the right to the variable on the left: Result <-- Value. So, when I see
I naturally read it as: Take Real GDP, factor prices in, and you get Nominal GDP. Sure, the math is correct. But you don't start with "real GDP". You start with GDP at actual prices -- called "nominal" -- and figure out real GDP. Rowe's arrangement of terms suggests that real output and the price level are "two directly observable magnitudes". But it is nominal GDP which is the directly observed measure.
Maybe it's harmless, like I said. I know Nick Rowe knows what's real and what's not, despite the confusing application of the word "real" to a calculated value and "nominal" to the actual value.
That's what I would have said, if I were responding to Nick's post.
Does it matter which is the actual value and which is calculated?
Oh yeah, it matters. Because if the "real GDP" number was really real, then Milton Friedman's "money relative to output" graphs would be perfectly valid. His graphs are not valid, because the only way to figure "real output" is by starting with "nominal" output and dividing out the price changes.
Once you do that, the price numbers are part of the "real output" numbers. And then when you divide the quantity of money by real output, you are actually multiplying the quantity of money by the price level. Arithmetic makes your numbers similar to the price numbers. Economics has nothing to do with it.
When you compare "money relative to output" to prices, as Milton Friedman did in his book Money Mischief, you are really comparing prices to prices-and-some-other-stuff. That's where the similarity comes from, similarity that Friedman erroneously offers as evidence to explain the cause of inflation.