Chapter 20

Think about the increase in spending for the Department of Homeland Security and the wars in Afghanistan and Iraq. These all represent government expenditures that have increased GDP yet the typical person might now necessarily be better off as a result. Why?

All of the above: GDP is not adjusted for pollution or other negative effects of production. GDP is not adjusted for crime or other social problems. The value of leisure is not included in GDP. GDP does not account for income distribution.

Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?

All of the above: GDP is not adjusted for pollution and it does not account for unequal income distribution. GDP is not adjusted for crime or other social problems. The value of leisure is not included in GDP.

real GDP per capita

The level of GDP per person, calculated by dividing the value of a country's real GDP by the country's population.

Which of the following is not a shortcoming of GDP as a measure of well-being?

GDP only counts final goods and services and not intermediate goods.

If Americans still worked 60-hour weeks as they did in 1890,

GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher.

How does the size of a country's GDP affect the quality of life of the country's people?

Generally, the more goods and services people have, the better off they are.

GDP is an imperfect measure of economic well-being because it fails to measure what types of production?

Household production and the underground economy.

We often use real GDP per capita as a measure of a country's well-being. Review the definition of real GDP per capita before answering the following question. Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890and the real GDP per capita today understate or overstate the difference in the population's economic well-being?

The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP.

Economic historians Roger Ransom and Richard Sutch have estimated that African-American farmers in the U.S. South after the Civil War worked about 30 percent fewer hours per year than they had as slaves before the Civil War. If after the Civil War, African-American farmers had continued to work these additional hours, their production and income would have been higher and so would have been U.S. GDP. The farmers well-being

would not have been higher as a result of working these additional hours because value of an individual's well-being is not included in GDP calculation.

An underground economy involves all of the following except

buying and selling of goods and services

An article in the New York Times describes the much greater use of cash, as opposed to checks and credit cards, in buying and selling in China. The article describes someone bringing several bags of cash containing the equivalent of $130,000 into a car dealership to buy a new BMW. Another article notes: "Many economists believe that the rise in [use of] cash is strongly related to growth in the so-called underground economy." The underground economy is the

buying and selling of goods and services that is concealed from the government.

Buyers and sellers in the underground economy prefer to use cash because

cash leaves little in the way of evidence or a paper trail.

After the Civil War, U.S. GDP

could have been higher if the farmers did not reduce their work hours.

Some countries have larger underground economies than do other countries, because

of government policies that are retarding economic growth.

According to most economists, is it a serious shortcoming of GDP that it does not count household production or production in the underground economy?

Most economists would answer "no" because these types of production do not affect the most important use of the GDP measure, which is to measure changes in total production over short periods of time.

Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs between 2003 and 2006 spent their time. They discovered that during the period when they were unemployed, the reduction in the number of hours of paid work was almost completely replaced by an increase in the number of hours spend on household production. Based on these findings, what can we predict about total production - whether or not that production is included in the calculation of GDP - in the economy when these workers became unemployed?

If the workers had been paying other people to perform the household activities prior to unemployment, then total production will fall.

Which of the following are likely to increase the measured level of GDP and which are likely to reduce it? a. When the number of people working outside the home decreases, the measured level of GDP b. When there is a sharp increase in the crime rate, the measured level of GDP c. If lower tax rates cause fewer people to hide the income they earn, the measured GDP

a. decreases. b. may increase or decrease. c. increases. All things equal, as the government increases taxes, disposable income decreases, which decreases consumption expenditures.

Household production and the underground economy

are not accounted for in the Commerce Department's estimates of GDP.