Gibson's Paradox

AAA

DEFINITION of 'Gibson's Paradox'

An economic observation made by British economist Alfred Herbert Gibson that points to the positive correlation between interest rates and the general price level. The findings are a paradox because it is contrary to the view generally held by economists at the time, which was that interest rates were correlated to the rate of inflation.

INVESTOPEDIA EXPLAINS 'Gibson's Paradox'

While Gibson was the first to note this paradox, J.M. Keynes' was first to give the observation a name. In his research, which he discusses in "A Treatise on Money" (1930), interest rates were highly correlated to wholesale prices but had little correlation to the rate of inflation. In this paradox, interest rate movements are connected to the level of prices, not the rate of change in prices.

RELATED TERMS
  1. Fiat Money

    Currency that a government has declared to be legal tender, but ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  3. Correlation

    In the world of finance, a statistical measure of how two securities ...
  4. Economics

    A social science that studies how individuals, governments, firms ...
  5. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  6. Inflation

    The rate at which the general level of prices for goods and services ...
RELATED FAQS
  1. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  2. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  3. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>
  4. How can tariffs cause inefficiencies in domestic industries?

    Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the ... Read Full Answer >>
  5. How do changes in interest rates affect the spending habits in the economy?

    Changes in interest rates can have different effects on consumer spending habits depending on a number of factors, including ... Read Full Answer >>
  6. How autonomous are special administrative regions?

    When most people think of special administrative regions, or SARs, they are referring to Hong Kong and its relationship with ... Read Full Answer >>
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Options & Futures

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  4. Investing Basics

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  5. Economics

    What Is Money?

    It's a part of everyone's life, and we all want it, but do you know how it gains value and how it is created?
  6. Stock Analysis

    The Top Performing Airlines Right Now

    Learn about the airline industry and its top-performing companies. Understand these top-emerging airlines and why they have taken more market share.
  7. Economics

    What Is a Quota?

    In business, quota usually refers to the sales target for a salesperson or a sales team.
  8. Economics

    What Does Infrastructure Mean?

    Examples of infrastructure include mass transit, communication, sewage, water and electric systems, plus roads, bridges and tunnels.
  9. Economics

    Calculating the GDP Price Deflator

    The GDP price deflator adjusts gross domestic product by removing the effect of rising prices. It shows how much an economy’s GDP is really growing.
  10. Economics

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!