Two Theories of Prices Eric Tymoigne
July 27, 2011
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Equations:
Quantity Theory of Money (QTM):
MV ≡ PQ
M = the money supply
V = the velocity of money
P = the price level
Q = the quantity of output
PQ = the amount of transactions on goods and services
MV = the amount of financial transactions needed to complete those transactions
Quantity Theory of Money (QTM) at full employment:
P = MV/Qfe
Qfe = the quantity of output at full employment
QTM in terms of growth rate:
gp = gm – gn
gp = rate of price level growth
gm = rate of money supply growth
gn = natural rate of economic growth
Income Approach to GDP:
PQ ≡ W + U
PQ = the nominal GDP
W = the wage bill
U = the gross profit
P ≡ W/Q + U/Q
W = wL
w = the wage rate
L = the number of hours of labor
P ≡ wL/Q + U/Q
Q/L = the quantity of output per labor hour, aka, the average productivity of labor (APl)
P ≡ w/APl + U/Q
w/API = the unit cost of labor
Income Approach to GDP with a proposed theory:
P = w/APl + U/Q
w = wage rate, set in a bargaining process that depends on the relative power of workers
APl = the average productivity of labor (aka, the quantity of output per labor hour), moves in function of the needs of the economy and the state of the economy
U = the nominal level of aggregate profit, depends on aggregate demand
Q = economic growth not at full employment, changes in function of expected aggregate demand
Income Approach to GDP in terms of growth rate:
gp = (gw – gAPl)sW + (gU – gQ)sU
gp = growth rate of price level
gw = growth rate of wages
gAPl = growth rate of the unit cost of labor
sW = the shares of wages in national income
gU = growth rate of gross profits
gQ = growth rate of the economy
sU = the shares of profit in national income
(sW + sU = 1)
(gU – gQ) = the pressures of aggregate demand on the economy
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