Evaluation of GDP

Question 1

What is the importance of the use of national income statistics (i.e. GDP/GNI)? (5 points)

Answer 1

1. Indicates the relative size of different countries’ economies
2. Monetary measure: tells us how much income a country earns in a year
3. GDP per capita tells us how many goods and services the average person consumes in a country and GNI per capita tells us how much income the average person earns in a country (i.e. representative of the standard of living)
4. Growth in GDP per capita when compared to growth in population gives us an idea of whether standard of living is improving or worsening
5. Allows governments to evaluate previous policies

Question 2

What are the disadvantages of the use of national income statistics?

Answer 2

1. Do not accurately measure the “true” value of output

2. Cannot accurately measure standards of living

Question 3

Why do GDP/GNI not accurately measure the “true” value of output?

Answer 3

1. Does not include non-marketed output, such as repairing one’s own house
   - likely to be far greater in less developed countries compared to more developed ones, thus exacerbating the perceived development gap between two countries
2. GDP and GNI do not include output sold in underground markets
3. GDP and GNI do not take into account quality improvements in goods and services
4. GDP and GNI do not account for the value of negative externalities
5. GDP and GNI do not account for differing domestic price levels

Question 4

Why do measures of GNI/GDP do not accurately measure standards of living?

Answer 4

1. GDP and GNI make no distinctions about the composition of output
2. GDP and GNI cannot reflect achievements in levels of education, health, and life expectancy
3. GDP and GNI provide no information on the distribution of income and output
4. GDP and GNI do not take into account increased leisure
5. GDP and GNI do not account for quality of life factors
   - crime rates, political freedom, etc.

Question 5

What is green GDP?

Answer 5

GDP that accounts for the value of resource and environmental destruction.

Green GDP = GDP - value of environmental destruction (and other pollution related expenditures such as cleaning environment and health care costs)

Question 6

What are the advantages of calculating green GDP?

Answer 6

1. Corrects a significant deficiency of GDP, and provides a more accurate value of output
2. Raises awareness of policy makers of the importance of clean technologies (as that would be the only way to achieve economic growth according to green GDP)

Question 7

What are the criticisms against Green GDP?

Answer 7

1. Many difficulties associated with calculating green GDP

2. GDP is not meant to take into account damage to environment