When real is nominal and nominal real: the world of falling prices

A newspaper headline tells me 'Pace of growth picks up in Japan." The actual figures bear out the statement. Japan's real GDP registered a quarter-on-quarter increase of 1.2 percent in the July-September quarter. The Japanese economy is expanding.

But is it? Take a look at the nominal GDP figures and one finds that by this measure, the quarter-on-quarter growth rate was a negative 0.1 percent. It's a tiny figure, admittedly, but clearly a shrinkage nonetheless.

So what is happening? Is the Japanese economy growing or isn't it? Are the real figures unreal? Are the nominal figures not nominal? Is it that the real is nominal and that the nominal is real? The mind boggles.

What a thing for an economist to say, you might exclaim accusingly. Or derisively, perhaps. Am I not aware that the difference between the nominal and the real in GDP statistics is the treatment of price changes?

Nominal figures take them on board. Real ones don't. In real terms, an orange is always an orange. Yesterday, today and tomorrow. But if the price of that orange doubles between today and tomorrow, tomorrow's one orange counts as today's two oranges in the nominal world. Thus, inflation creates the illusion of growth, when all that is actually happening is that consumers are being made to pay more for the same thing. People get conned in the nominal world. So we should always turn to the real world for the real answers. Right?

Not really. In a world of falling prices, which is where we dwell at present, the real can be just as much an illusion as the nominal. A 1.2 percent quarter-on-quarter growth translates into a 4.8 percent growth in annualized terms. An almost 5 percent economic expansion doesn't sound at all bad.

Yet look around you and what do you see. Workers registered with manpower dispatching agencies get dispatched nowhere. Job-seeking graduates cannot find jobs anywhere. Wage earners are earning less and less wages. Is all this supposed to happen in a growing economy? The situation is bizarre.

This is a world in which tomorrow's one orange is worth not two of today's oranges but only half. Good, you might say. Wait until tomorrow and we can all buy two oranges for the price of one. Yes, but not all of us. What good is a half-price orange to people whose wages are falling faster than its price? Or for people who have lost jobs altogether in the interim. For them, a real-term growth rate of 4.8 percent has no reality whatsoever.

I have it on good authority that there are now sweaters on sale for ¥99. Not ¥990. Just plain ¥99. Imagine the level, or indeed the nonlevel, of wages required to arrive at that kind of selling price. The nonlevel wage earners involved in producing those ¥99 sweaters will certainly not be able to afford them. A 4.8 percent real GDP growth rate that is achieved on the strength of ¥99 sweater production surely does nobody any good.

We really ought to stop using the terms nominal and real when all this stuff is going on. Money-GDP and goods-GDP might be marginally better terms for expressing it. In that case, we can say that when prices are spiraling upward, goods-GDP is a better gauge of what is really happening. When the price trajectory is diving, money-GDP tells the real story better.

Either way, though, it is people-GDP that gets the raw deal. What a terrible world.