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I think I have argued along the following lines before in a comment thread, but let's do it again...

The nominal GDP is easily understood: the price of all goods and services purchased in a year:

G = sum_i p_i q_i

where i labels the products, p is price (or the average average for similar products/services) and q is quantity. (Price here is properly replaced by value added, but for the purposes of this argument that's a nitpick)

Then, approximately from one time period to the next...

dG = sum_i dp_i q_i + sum_i p_i dq_i + O(dt²)

The first term is inflation, the second term is real GDP growth, and the third term is an error term that becomes negligible when the time periods are small enough.

We have met the enemy, and it is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Oct 10th, 2007 at 06:20:04 PM EST
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