Ch.16 GDP (II) Flashcards
What is nominal GDP?
GDP at current market prices, measure the market value of final goods and services at current prices.
What is Real GDP?
GDP at constant market prices. It measures the market value of final goods and services at the prices of base year. It shows the real value.
What are the limitations of national income statistics?
- Population size.
- Price level.
- Composition of GDP.
- Leisure time/ working hours.
- Consumption of non-market goods.
- Externalities
Elaborate on population size as one of the limitations of national income statistics.
The larger the population size of a place is, the higher its GDP will be. The living standard of the place’s people will thus tend to be overestimated. Using per capita GDP to reflect the place’s average income. However if the income distribution is highly uneven, over-estimation may still exist.
Elaborate on price level as one of the limitations of national income statistics.
A rise in nominal GDP may be caused by a rise in price level only without actual growth in real income. People’s living standard will be overestimated. Using real GDP to reflect the change of a place’s output level and real income.
Elaborate on composition of GDP as one of the limitations of national income statistics.
- The greater the proportion of C or I in GDP is, the higher the living standard people have at present.
- On the other hand, the higher the government expenditure, the lower the economic performance and lower people’s living standard.
- Using consumption expenditure, instead of GDP, to reflect people’s living standard of a place. Per capita real consumption expenditure even will be the best indicator.
Elaborate on leisure time and working hour as one of the limitations of national income statistics.
The more leisure and hence the fewer working hours people enjoy, the higher living standard they tend to have.
Elaborate on consumption of non market goods as one of the limitations of national income statistics.
The more active the non marketed activities are, the more likely GDP and people’s living standard will be underestimated.
Elaborate on externalities as one of the limitations of national income statistics.
External effects influence social welfare but are rarely counted.
1. If positive external effects exists, GDP statistics tend to understate people’s living standard.
2. If negative external effects exist, GDP statistics tend to overestimate people’s living standard.
For example, the more serious the pollution is, the lower living standard the people have. GDP statistics tend to overestimate people’s living standard.
