8.2: Does GDP Measure What We Want It to Measure?

Which of the following is not a shortcoming of GDP as a measure of​ well-being? If Americans still worked​ 60-hour weeks, as they did in​ 1890, _________________.

GDP only counts final goods and services and not intermediate goods. GDP would be much higher than it​ is, but the​ well-being of the typical person would not necessarily be higher.

An article in the Economist states that​ "the appeal of GDP is that it​ offers, or seems​ to, a summary statistic of how well an economy is​ doing." ​Source:​ "The Euro-Area​ Economy: Speeding​ Up," Economist​, May​ 6, 2017. In what sense does GDP offer a summary statistic of how well an economy is​ doing? Why qualify the statement about GDP as a summary statistic by including the phrase​ "or seems​ to"?

Since GDP measures how much an economy produces during a period of​ time, it may also indicate​ well-being. As a summary​ statistic, GDP overlooks some areas of production that take place in an economy

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

of government policies that are retarding economic growth.

GDP is an imperfect measure of economic​ well-being because it fails to measure what types of​ production? Even if GDP included these types of​ production, why would it still be an imperfect measure of economic​ well-being? A. GDP is not adjusted for crime or other social problems. B. GDP is not adjusted for pollution and it does not account for unequal income distribution. C. The value of leisure is not included in GDP. D. All of the above. E. A and C only.

Household production and the underground economy. D. All of the above.

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 spent on household production. ​Source: Michael Burda and Daniel S.​ Hamermesh, "Unemployment and Household​ Production," National Bureau of Economic Research working paper​ 14676, January 2009. 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.

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 1890 and 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.

According to research by Rafael La Porta of Tuck School of Business at Dartmouth and Andrei Shleifer of Harvard​ University, in developing​ countries, the average firm in the informal​ sector, or underground​ economy, employs 4 workers as opposed to 126 workers employed by the average firm in the formal sector. ​Sources: Rafael La Porta and Andrei​ Shleifer, "Informality and​ Development," Journal of Economic Perspectives​, Vol.​ 28, No.​ 3, Summer​ 2014, pp.​ 109-126. What is the informal​ sector, or underground​ economy? Why would we expect firms in the informal sector to be so much smaller than firms in the formal​ sector?

The informal sector is the sector of the economy where production is concealed from the government. Because firms in the informal sector are operating​ illegally, they have less capital than firms operating legally.

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 increases​, the measured level of GDP b. When there is a sharp decrease 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 ----------------------------------- a1. When the number of people working outside the home decreases​, the measured level of GDP

a. increases b. may increase or decrease c. increases a1. decreases

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

are not accounted for in the Bureau of Economic​ Analysis' estimates of GDP. 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.

An underground economy involves all of the following except

buying and selling of goods and services by obtaining a permit from the government.

An article in the Wall Street Journal noted that many economists believe that GDP data for India are unreliable because​ "most enterprises are tiny and​ unregistered, and most workers are employed off the books. The​ government's infrequent surveys represent only a best guess of the value being added in​ back-alley workshops, outdoor markets and other​ cash-based corners of the​ economy." ​Source: Raymond​ Zhong, "On Close​ Inspection, India's Sharp Growth Picture Gets​ Fuzzy," Wall Street Journal​, May​ 1, 2016. Working​ "off the​ books" refers to _____________________. The problems of small firms working off the books and far from major cities would make it difficult for the Indian government to accurately measure GDP because the _____________________. If government cannot accurately measure​ GDP, ______________.

earning income that is not reported for tax purposes. measures of GDP will be understated if these practices are common. businesses will not be able to correctly gauge the​ market, and the government will be unable to design efficient tax policies.

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.

The following data for 2015 are from the Organization for Economic​ Co-operation and Development​ (OECD). The average German worker worked about 400 fewer hours per year and earned nearly​ $14,000 less than did the average worker in the United States. Can we conclude anything about the​ well-being of the average German worker versus the​ well-being of the average worker in the United States from these​ data? What other measures would you like to see in evaluating the​ well-being of workers in these two​ countries? ​Source: stat.oecd.org. Can we conclude anything about the​ well-being of the average German worker versus the​ well-being of the average worker in the United States from these​ data? What measures besides average number of hours worked and real per capita GDP would you like to have to evaluate the​ well-being of workers in OECD​ countries?

​No, because although the German worker earned less per​ year, they also worked less per year. Indicators of​ pollution, crime and other social​ problems, and the distribution of income.