Suppose you’re in a country that grows and consumes lots of cabbages, and all the cabbages consumed are home-grown. Suppose that one year people suddenly, for no apparent reason, decide that they like cabbages a lot more than they used to, and the price doubles. But at least to begin with, rates of production remain the same throughout the economy. Does this help or harm the economy, or have no effect?
In one sense it ‘obviously’ has no effect, because the same quantities of all goods and services are produced ‘before’ and ‘afterwards’. So whether we’re evaluating them according to the ‘earlier’ or the ‘later’ utility function, the total value of what we’re producing hasn’t changed. (Presumably the prices of non-cabbages would decline to some extent, so it’s at least consistent that GDP wouldn’t change, though I still can’t see anything resembling a mathematical proof that it wouldn’t.)
Here’s another question to chew on:
Suppose you’re in a country that grows and consumes lots of cabbages, and all the cabbages consumed are home-grown. Suppose that one year people suddenly, for no apparent reason, decide that they like cabbages a lot more than they used to, and the price doubles. But at least to begin with, rates of production remain the same throughout the economy. Does this help or harm the economy, or have no effect?
In one sense it ‘obviously’ has no effect, because the same quantities of all goods and services are produced ‘before’ and ‘afterwards’. So whether we’re evaluating them according to the ‘earlier’ or the ‘later’ utility function, the total value of what we’re producing hasn’t changed. (Presumably the prices of non-cabbages would decline to some extent, so it’s at least consistent that GDP wouldn’t change, though I still can’t see anything resembling a mathematical proof that it wouldn’t.)