Friday, January 10, 2014

One more on Milton Friedman

Thinking of it in economic terms, conceptually, it is perfectly valid to take actual-price GDP and strip away the price changes, and then compare inflation-adjusted GDP to anything you want. It makes perfect sense.

It doesn't matter.

Mathematically, if you divide something by inflation-adjusted GDP, and the "something" is not also inflation-adjusted, the result you get is just as if you divide by actual GDP and multiply by prices.

GDP provides the context. Multiplying by prices distorts the "something" into a prices-like shape, generating pseudo-evidence you can use to claim that the "something" is the cause of inflation. For example, Milton Friedman used this technique to support his claim that inflation is always and everywhere a monetary phenomenon.

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