Does GDP measure growth in the economy or simply growth in the money supply?

TL;DR

This paper questions whether GDP truly measures economic production or merely reflects changes in the money supply, highlighting that GDP may be confounded by monetary factors rather than real growth.

Contribution

It challenges the assumption that GDP measures actual production, proposing that it primarily captures changes in the money supply and providing empirical evidence to support this claim.

Findings

GDP normalized for money supply growth has been shrinking over 20 years

Velocity of money does not influence price levels as traditionally claimed

Empirical analysis of nine countries supports the monetary confounding of GDP

Abstract

Gross Domestic Product(GDP) is a widely used measurement of economic growth representing the market value of all final goods and services produced by a country within a given time. In this paper we question the assumption that GDP measures production, and suggest that in reality it merely captures changes in the rate of expansion of the money supply used to measure the price data it is derived from. We first review the Quantity Theory of Money $MV=PT$, and show that the Velocity of Circulation of Money(V) does not affect the price level as claimed, as it is also a factor of the quantity of transactions(T). It then follows directly that attempts to measure total production from any form of price data as the GDP measurement does, will necessarily be confounded by the inverse relationship between prices and the quantity of production, which requires that as the total quantity of production increases, prices will drop. Finally, in support of this claim we present an empirical analysis of the GDP of nine countries and one currency union, showing that when normalized for money supply growth GDP measures have been uniformly shrinking over the last 20 years, and discuss the possible reasons for this behaviour.