The Nonlinear Library: LessWrong LW - Some Unorthodox Ways To Achieve High GDP Growth by johnswentworth
Aug 8, 2024
11:58
Link to original article
Welcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Some Unorthodox Ways To Achieve High GDP Growth, published by johnswentworth on August 8, 2024 on LessWrong.
GDP growth, as traditionally calculated,
is a weird metric. People interpret it as measuring "economic growth", but… well, think about electronics. Electronics which would have cost millions of dollars (or more) in 1984 are now commonplace, everyone carries them around in their pockets. So if we calculate GDP growth based on 1984 prices, then GDP has grown multiple orders of magnitude since then, everyone now owns things which would make 1984's wealthiest people jealous, and practically all of that growth has come from electronics.
On the other hand, if we calculate GDP based on 2024 prices, then all of the digital electronics produced before, say, 2004 are worth almost nothing, so electronics contributed near-zero GDP growth throughout the entire internet boom.
Economists didn't like either of those conclusions, so back in the 90's, they
mostly switched to a different way of calculating GDP growth: "chaining". Basically, we calculate 1984-1985 GDP growth using prices from 1984-1985, then 1985-1986 GDP growth using prices from 1985-1986, and so forth. At the end, we multiply them all together (i.e. "chain" the yearly growth numbers) to get a long-term growth line. Chaining gives less dramatic GDP growth numbers when technological changes make previously-expensive things very cheap.
Chaining also opens up some interesting new methods for achieving high GDP growth.
A Toy Example
Suppose we have two goods, A and B. Over the course of five years, the price of each good and the amount consumed evolve as follows:
Year
Price A
Amount A
Price B
Amount B
1
$1
10
$10
1
2
$1
1
$10
10
3
$10
1
$1
10
4
$10
10
$1
1
5
$1
10
$10
1
The main thing to notice about this table is that year 5 is exactly the same as year 1; our toy economy goes full-circle back to where it started.
Now let's calculate the GDP growth for this toy economy, using the same standard chaining method
adopted by the Bureau of Economic Analysis for calculating US GDP back in the 90's.
Calculation details (click to expand)
To calculate the GDP growth from year t to year t+1, we calculate the ratio of year t+1 to year t consumption using year t prices, then calculate the ratio of year t+1 to year t consumption using year t+1 prices, then average those together using a geometric mean. So the formula is:
Δt+1t=iptiqt+1iiptiqtiipt+1iqt+1iipt+1iqti
where:
i ranges over the goods (here A and B)
p is price
q is quantity
To get GDP growth over the whole timespan, we multiply together the growth for each year.
Here's the result:
Year
Price A
Amount A
Price B
Amount B
GDP Growth
1
$1
10
$10
1
2
$1
1
$10
10
5.05
3
$10
1
$1
10
1
4
$10
10
$1
1
5.05
5
$1
10
$10
1
1
So overall, the GDP growth for the five-year period (according to the chaining method) is 5.05*1*5.05*1 = 25.5. Roughly 2450% growth over four years! Pretty impressive, especially considering that prices and consumption in the final year were exactly the same as prices and consumption in the first year. At that point, why not do it again, to maintain that impressive GDP growth?
Some Policy Suggestions
Our toy example raises an exciting possibility for politicians and policymakers[1]: what if you could achieve high GDP growth without the notoriously difficult and error-prone business of changing long-run prices or consumption? What if everything could just… go in a circle, always going back to where it started, and thereby produce safe, reliable, high GDP growth?
The basic pattern in our toy example is:
Prices shift: a popular good becomes cheap, a good rarely purchased becomes expensive
Consumption shifts: consumers buy less of the cheaper good, and more of the expensive good
Prices shift back
Consumers shift back
To match the toy example, shifts must happen in t...
Welcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Some Unorthodox Ways To Achieve High GDP Growth, published by johnswentworth on August 8, 2024 on LessWrong.
GDP growth, as traditionally calculated,
is a weird metric. People interpret it as measuring "economic growth", but… well, think about electronics. Electronics which would have cost millions of dollars (or more) in 1984 are now commonplace, everyone carries them around in their pockets. So if we calculate GDP growth based on 1984 prices, then GDP has grown multiple orders of magnitude since then, everyone now owns things which would make 1984's wealthiest people jealous, and practically all of that growth has come from electronics.
On the other hand, if we calculate GDP based on 2024 prices, then all of the digital electronics produced before, say, 2004 are worth almost nothing, so electronics contributed near-zero GDP growth throughout the entire internet boom.
Economists didn't like either of those conclusions, so back in the 90's, they
mostly switched to a different way of calculating GDP growth: "chaining". Basically, we calculate 1984-1985 GDP growth using prices from 1984-1985, then 1985-1986 GDP growth using prices from 1985-1986, and so forth. At the end, we multiply them all together (i.e. "chain" the yearly growth numbers) to get a long-term growth line. Chaining gives less dramatic GDP growth numbers when technological changes make previously-expensive things very cheap.
Chaining also opens up some interesting new methods for achieving high GDP growth.
A Toy Example
Suppose we have two goods, A and B. Over the course of five years, the price of each good and the amount consumed evolve as follows:
Year
Price A
Amount A
Price B
Amount B
1
$1
10
$10
1
2
$1
1
$10
10
3
$10
1
$1
10
4
$10
10
$1
1
5
$1
10
$10
1
The main thing to notice about this table is that year 5 is exactly the same as year 1; our toy economy goes full-circle back to where it started.
Now let's calculate the GDP growth for this toy economy, using the same standard chaining method
adopted by the Bureau of Economic Analysis for calculating US GDP back in the 90's.
Calculation details (click to expand)
To calculate the GDP growth from year t to year t+1, we calculate the ratio of year t+1 to year t consumption using year t prices, then calculate the ratio of year t+1 to year t consumption using year t+1 prices, then average those together using a geometric mean. So the formula is:
Δt+1t=iptiqt+1iiptiqtiipt+1iqt+1iipt+1iqti
where:
i ranges over the goods (here A and B)
p is price
q is quantity
To get GDP growth over the whole timespan, we multiply together the growth for each year.
Here's the result:
Year
Price A
Amount A
Price B
Amount B
GDP Growth
1
$1
10
$10
1
2
$1
1
$10
10
5.05
3
$10
1
$1
10
1
4
$10
10
$1
1
5.05
5
$1
10
$10
1
1
So overall, the GDP growth for the five-year period (according to the chaining method) is 5.05*1*5.05*1 = 25.5. Roughly 2450% growth over four years! Pretty impressive, especially considering that prices and consumption in the final year were exactly the same as prices and consumption in the first year. At that point, why not do it again, to maintain that impressive GDP growth?
Some Policy Suggestions
Our toy example raises an exciting possibility for politicians and policymakers[1]: what if you could achieve high GDP growth without the notoriously difficult and error-prone business of changing long-run prices or consumption? What if everything could just… go in a circle, always going back to where it started, and thereby produce safe, reliable, high GDP growth?
The basic pattern in our toy example is:
Prices shift: a popular good becomes cheap, a good rarely purchased becomes expensive
Consumption shifts: consumers buy less of the cheaper good, and more of the expensive good
Prices shift back
Consumers shift back
To match the toy example, shifts must happen in t...