Framing: Prices reflect how much trouble purchasers would be in if the seller didn’t exist. GDP multiplies prices by transaction volume, so it measures the fragility of the economy.
Prices decompose into cost and profit. The profit is determined by how much trouble the purchaser would be in if the seller didn’t exist (since e.g. if there’s other sellers, the purchaser could buy from those). The cost is determined by how much demand there is for the underlying resources in other areas, so it basically is how much trouble the purchaser imposes on others by getting the item. Most products are either cost-constrained (where price is mostly cost) or high-margin (where price is mostly profit).
GDP is price times transaction volume, so it’s the sum of total costs and total profits in a society. The profit portion of GDP reflects the extent to which the economy has monopolized activities into central nodes that contribute to fragility, while the cost portion of GDP reflects the extent to which the economy is resource-constrained.
The biggest costs in a modern economy is typically labor and land, and land is typically just a labor cost by proxy (land in the middle of nowhere is way cheaper, but it’s harder to hire people). The majority of the economy is cost-constrained, so for that majority, GDP reflects underpopulation. The tech sector and financial investment sector have high profit margins, which reflects their tendency to monopolize management of resources.
Low GDP reflects slack. Because of diminishing marginal returns and queuing considerations, ideally one should have some slack, since then there’s abundance of resources and easy competition, driving prices down and thus leading to low GDP at high quality of life. However, slack also leads to conflict because of reduced opportunity cost. This conflict can be reduced with policing, but that increases authoritarianism. This leads to a tradeoff between high GDP and high tension (as seen in the west) vs low GDP and high authoritarianism (as seen in the east) vs low GDP and high conflict (as seen in the south).
Exports and imports are tricky but very important to take into account here because they have two important properties:
* They are “subtracted off” the GDP numbers in my explanation above (e.g. if you import a natural resource, then that would be considered part of the GDP of the other country, not your country)
* They determine the currency exchange rates (since the exchange rate must equal the ratio of imports to exports, assuming savings and bonds are negligible or otherwise appropriately accounted for) and thereby the GDP comparisons across different countries at any given time
Hmm… Issue is it also depends on centralization. For a bunch of independent transactions, fragility goes up with the square root of the count rather than the raw count. In practice large economies are very much not independent, but the “troubles” might be.
Framing: Prices reflect how much trouble purchasers would be in if the seller didn’t exist. GDP multiplies prices by transaction volume, so it measures the fragility of the economy.
Prices decompose into cost and profit. The profit is determined by how much trouble the purchaser would be in if the seller didn’t exist (since e.g. if there’s other sellers, the purchaser could buy from those). The cost is determined by how much demand there is for the underlying resources in other areas, so it basically is how much trouble the purchaser imposes on others by getting the item. Most products are either cost-constrained (where price is mostly cost) or high-margin (where price is mostly profit).
GDP is price times transaction volume, so it’s the sum of total costs and total profits in a society. The profit portion of GDP reflects the extent to which the economy has monopolized activities into central nodes that contribute to fragility, while the cost portion of GDP reflects the extent to which the economy is resource-constrained.
The biggest costs in a modern economy is typically labor and land, and land is typically just a labor cost by proxy (land in the middle of nowhere is way cheaper, but it’s harder to hire people). The majority of the economy is cost-constrained, so for that majority, GDP reflects underpopulation. The tech sector and financial investment sector have high profit margins, which reflects their tendency to monopolize management of resources.
Low GDP reflects slack. Because of diminishing marginal returns and queuing considerations, ideally one should have some slack, since then there’s abundance of resources and easy competition, driving prices down and thus leading to low GDP at high quality of life. However, slack also leads to conflict because of reduced opportunity cost. This conflict can be reduced with policing, but that increases authoritarianism. This leads to a tradeoff between high GDP and high tension (as seen in the west) vs low GDP and high authoritarianism (as seen in the east) vs low GDP and high conflict (as seen in the south).
Exports and imports are tricky but very important to take into account here because they have two important properties:
* They are “subtracted off” the GDP numbers in my explanation above (e.g. if you import a natural resource, then that would be considered part of the GDP of the other country, not your country)
* They determine the currency exchange rates (since the exchange rate must equal the ratio of imports to exports, assuming savings and bonds are negligible or otherwise appropriately accounted for) and thereby the GDP comparisons across different countries at any given time
If there are 10 sellers selling the same thing for the same price, I wouldn’t be in any trouble if one of them stopped existing.
And they wouldn’t be getting any profit. (In the updated comment, I noted it’s only the profit that measures your trouble.)
Hmm… Issue is it also depends on centralization. For a bunch of independent transactions, fragility goes up with the square root of the count rather than the raw count. In practice large economies are very much not independent, but the “troubles” might be.