Gibson's paradox
Encyclopedia
Gibson's Paradox is the observation that the rate of interest
and the general level of prices
are positively correlated. It is named for British economist Alfred Herbert Gibson who noted the correlation in a 1923 article for Banker's Magazine.
The term was first used by John Maynard Keynes
, in his 1930 work, A Treatise on Money
. It was believed to be a paradox because most economic theorists predicted that the correlation would be negative. Keynes commented that the observed correlation was "one of the most completely established empirical facts in the whole field of quantitative economics."
Economists held the view that interest rate was correlated to the rate of inflation where as Keynes' findings contradicted this view. During the period of gold standard
, he observed that interest rate was correlated to the general price level, and not the rate of change in the prices.In fact, he thought that interest rate was highly correlated to the Wholesale Price Index
rather than the rate of inflation.
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
and the general level of prices
Price level
A price level is a hypothetical measure of overall prices for some set of goods and services, in a given region during a given interval, normalized relative to some base set...
are positively correlated. It is named for British economist Alfred Herbert Gibson who noted the correlation in a 1923 article for Banker's Magazine.
The term was first used by John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
, in his 1930 work, A Treatise on Money
A Treatise on Money
A Treatise on Money is a work on economics by English economist John Maynard Keynes. In the Treatise Keynes drew a distinction between savings and investment, arguing that where saving exceeded investment, recession would occur....
. It was believed to be a paradox because most economic theorists predicted that the correlation would be negative. Keynes commented that the observed correlation was "one of the most completely established empirical facts in the whole field of quantitative economics."
Economists held the view that interest rate was correlated to the rate of inflation where as Keynes' findings contradicted this view. During the period of gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, he observed that interest rate was correlated to the general price level, and not the rate of change in the prices.In fact, he thought that interest rate was highly correlated to the Wholesale Price Index
Wholesale price index
The Wholesale Price Index is the price of a representative basket of wholesale goods. Some countries use WPI changes as a central measure of inflation. However, United States now report a producer price index instead.The Wholesale Price Index or WPI is "the price of a representative basket of...
rather than the rate of inflation.