On today’s show we are talking about some of the tricks that bureaucrats use to manipulate the inflation metrics that are being used to decide monetary policy. The cost of money affects the cost of virtually everything we buy. So the power to manipulate the economy and affect the fortunes of an entire population is in the hands of a handful of people who quite frankly have not earned the right to wield so much power.
But before we talk about the manipulations we need to define a few terms so that the incentive for the manipulation is clearly visible.
Let’s start with the gross domestic product. You calculate the GDP by adding up all of the economic activity and that gives you the gross domestic product. If the amount of economic activity has grown, by say, 2%, then the economy grew by 2%. But wait a minute, we know that there is this thing called inflation.
So in fact we need to subtract the rate of inflation from the GDP metric in order to get the real GDP metric that has been adjusted for inflation. In our example, if the economy grew in nominal terms by 2%, but inflation was running at 1%, then we would need to subtract the 1% inflation rate from the nominal GDP in order to get the real GDP.
So getting an accurate measurement of inflation is critical to getting an accurate measurement of GDP.
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Host: Victor Menasce
email: podcast@victorjm.com