K-Percent Rule

The K-Percent Rule is the idea that a country’s central bank should increase the money supply by the same amount as the growth rate of real GDP each year. It's the brainchild of Milton Friedman. See: Monetarism.

If the money supply...the amount of money in the system...increased along with GDP, it would mean that the amount of value per dollar remains constant.

In the U.S., the Federal Reserve does change the money supply depending on GDP—increasing money supply when the economy is slow, and decreasing money supply when growth is fast. That means that the Fed is acting more extreme than a K-percenter would like.

Related or Semi-related Video

Finance: What are Gross Domestic Product...8 Views

00:00

Finance Allah Shmoop What are gross domestic product GDP and

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gross national product GNP So how do you know how

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great your country is Well you can measure how many

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missiles you have or you can count the number of

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Olympic gold medals You've one or you can count the

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number of Starbucks locations you have all over your country

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for you can measure the strength of your economy Well

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how do you do that Economists used to main measures

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One is called gross domestic product called gross national product

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Gross domestic product might sound like what happens when you

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flush a baby alligator down the toilet And three years

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later it crawls back out looking for its mommy But

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in actuality it represents the total value of all the

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stuff you make in your country along with all the

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services you provide You know like legal services and dental

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cleaning services and stuff like that And you know that's

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provided by your citizens There You live on the sovereign

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island nation of squish squad Scary Located just offshore of

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Norway you are one of twelve inhabitants and all of

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you fish for herring all day Each of you catch

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an average of ten pounds of herring every day Hearing

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sells for about ten bucks a pound and everyone works

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two hundred days a year so multiply that all up

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and you get twelve People work in two hundred days

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a year each each catching ten pounds each day with

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each pound selling for ten bucks And well you could

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say the GDP of squish squad Scary is two hundred

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forty thousand dollars That's the value of all the stuff

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you're country made in a year Meanwhile elsewhere in the

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world the numbers get a bit higher For instance the

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GDP of the U S was about nineteen trillion dollars

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in two thousand seventeen so Well yeah that's a little

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bit more But of course the U S has three

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hundred twenty five million ish people in it instead of

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the twelve squid squid aeons And its GDP includes things

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like airplane manufacturing and high value financial transactions And you

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know shmoop subscription sales instead of just herring fishing So

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it makes sense that the U S economy would be

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much much bigger toe Look at how an economy is

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doing People usually watch how it changes over time say

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one of your fellow squish Quaid Ian's starts fishing with

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dynamite Well it's a new technique Output goes from ten

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point today to twelve next year With the new output

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your GDP goes two hundred eighty eight thousand from the

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two forty and change before That's twenty percent GDP growth

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in a year We'll guess what big complex economies like

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the US pretty much never see growth rates like that

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Economists usually consider it a healthy growth rate to be

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more like two or three percent in a given year

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Smaller countries and developing countries can have bigger growth rates

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Right Like take China It's a big country biggest population

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in the world with no more than a billion and

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a half people But it's still racks up relatively high

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GDP growth rates because of the rapid expansion of its

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manufacturing base Right they optimize their farmers and take them

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from growing turn ups and instead have them assemble semiconductors

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and stuff like that way higher margin to sell a

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semiconductor than a turnip As recently as two thousand ten

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China put up annual GDP growth rates still in the

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double digits like ten percent and hit double digits and

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change for five consecutive years in the early two thousand

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Well GDP doesn't always go up in nations around the

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world The year after discovering dynamite fishing swish squad Ian's

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suffered a Siri's of significant storms The number of work

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days went down from two hundred to one ninety Everything

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else stayed the same self In that year GDP fell

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to two hundred seventy three thousand and change from the

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two eighty eight It was the year before decline of

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five percent Well he kind of is called that decline

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a contraction if a contraction happens for two or more

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quarters in a row so like two three months periods

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in a row the country is considered to be in

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a recession If the contractions air deep enough and last

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long enough well then that's called the depression like it

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goes on for a year Two years or three years

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Both GDP and GNP measure the economic output of a

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country but they used different definitions about what all that

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entails Gross domestic product consists of all the products and

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services made it given your inside the country So you

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know made within the borders of the country made domestically

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gross national product measures the stuff made by people or

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companies from a country regardless of where it was actually

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made like you're an American citizen No building pots or

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pottery in Mexico We found that in the GNP number

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so GDP tracks where it was made GNP tracks Who

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made it So if an American it's a toilet cozy

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while sitting in his living room in Des Moines that

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gets included in both GDP and GNP However if an

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American goes on vacation Teo Cameroon and it's a toilet

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cozy in his hotel room there well that's included in

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GNP but not in GDP was made by an American

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but not in America Well meanwhile if the American comes

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back home to Des Moines and a Scottish friend of

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his comes over and it's a toilet cozy for him

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that would count in GDP but not in GNP right

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The toilet cozy was made in the US but not

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by an American In the old days like before the

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nineteen nineties GNP was typically used to track national economic

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growth However with the dramatic rise of globalization around that

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time GDP became much easier to track Eventually it became

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the go to measure of growth to review Both GMP

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and GDP track national economic output They both look at

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the amount of goods and services produced by the country

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though they have different working definitions about what that means

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The size of GDP and GNP are impacted by the

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size of a country In the level of economic and

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technical sophistication Big complex economies like the US usually aspire

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to modest growth like two or three percent smaller Countries

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in developing economies can post much higher growth rates with

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percentages in the double digits Not being all that uncommon

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GDP measures the value of stuff produced within a country

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regardless of who makes it GNP measures the value of

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stuff made by citizens of a country regardless of where

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it's made So if a squish squatty and citizen were

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toe float a raft into Norwegian waters and catch some

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herring there While that would count on GNP on their

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books but not G Meanwhile if he invited a Norwegian

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friend over for a day of fishing for anything that

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Norwegian caught would count on the squish Wadi and GDP

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but not on the squish Claudia and G N P

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if the scratch Wadi Ins were to launch a surprise

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attack on Norway However wealth and all bets would be 00:06:23.518 --> [endTime] off You just have to see who is

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