Transcript Economics 1010b: Macroeconomics

Comments on
Demand Shocks
and Real GDP Measurement
by Emi Nakamura
Discussion by Susanto Basu
SSHRC Conference, Vancouver, June 29, 2004
The really quick summary
S
P1D
D’
S’
P0
P1S
D
Q0
Demand & Real GDP
Q1
CRIW Conference, June 29, 2004
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Index number theorist’s reaction
• This is a novel and striking result
• Also very simple—once explained!
• Explains some puzzling facts
• Demand shocks create interpretation problems for
Fisher and Paasche indices
• But can attach an utility-based interpretation to
Laspeyres index
Demand & Real GDP
CRIW Conference, June 29, 2004
3
Macroeconomist’s reaction
• One more reason to not attach a structural
interpretation to real GDP
• Are problems worse than, e.g., aggregation across
consumers with differing MU’s of wealth?
• Macroeconomists will ignore measurement issues
unless they matter for particular applications
• Needed: Example(s) where macroeconomists will
draw wrong/misleading conclusions by using chainweighted real GDP when there are demand shocks
Demand & Real GDP
CRIW Conference, June 29, 2004
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One example of a macro application*
• In a multi-sector economy, suppose a transitory, persistent
technology improvement in, say, sector 1 raises Q1(t) by X(t)
• Now suppose instead a transitory demand shock that has the
same effect on the time path of Q1(t)
• The increase in total GDP due to the technology shock will
appear smaller (because P1 falls), but will also appear more
persistent—since P1 is rising as the shock fades away
• By contrast, the demand shock will appear less persistent,
because GDP will rise by more on impact (since P1 will rise with
Q1), but then also fade away more quickly, since P1 will fall as
Q1 asymptotes back to zero.
• Thus the persistence of GDP, which is of great interest to
macroeconomists, depends on the type of shocks
* Inspired by a comment from Carol Corrado
Demand & Real GDP
CRIW Conference, June 29, 2004
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