Measuring the Economy: Limitations of GDP and Cost of Living

Question 1

Nominal GDP

What is the formula?

Answer 1

GDPY = q1Y · p1Y + q2Y · p2Y + . . .

where Y denotes a specific year. E.g. 100 · 0.25 + 5 · 10 = 75

Question 2

Price changes

100 · 0.25 + 5 · 10 = 75 = GDP0

Then if in the next year prices increase to 0.3 and 11 then nominal GDP would be

Answer 2

100 · 0.3 + 5 · 11 = 85 = GDP1

Question 3

Constant price GDP
One means to calculate GDP for comparison with previous year(s) is to use the same prices as in the ___________ _____, rather than the ___________ ________ ________. In the previous example, in which prices had changed but quantities had not, constant price GDP would have remained the same

Answer 3

One means to calculate GDP for comparison with previous year(s) is to use the same prices as in the previous year, rather than the current market prices. In the previous example, in which prices had changed but quantities had not, constant price GDP would have remained the same

Question 4

GDP and wellbeing I

“GDP can often be described as a measure of _______ , _________, or well-being. It is none of these and has not been designed to be an all-encompassing indicator for these concepts. GDP is a measure of __________activity and, whilst there may be a link between this and wealth and welfare, such a link is ___________.”

ONS Guide to the UK National Accounts, March 2020, section 3

Answer 4

“GDP can often be described as a measure of wealth, welfare, or well-being. It is none of these and has not been designed to be an all-encompassing indicator for these concepts. GDP is a measure of economic activity and, whilst there may be a link between this and wealth and welfare, such a link is complex.”

ONS Guide to the UK National Accounts, March 2020, section 3

Question 5

GDP and wellbeing, why are they not heavily linked? (3)

Answer 5

• if a parent goes to work and pays for professional childcare then GDP will be higher than if they did not
  work, or if the child was cared for by relatives.
• If an emergency necessitates extra spending (e.g. on masks and lateral flow tests) then GDP will increase but
  social welfare has not increased.
• Many of the things which make life worthwhile are weakly related to economic activity - for example, GDP and life expectancy

Question 6

Consumer Prices Index I

The GDP deflator reflects the prices of all components of GDP, including ____________ and _____________ ___________. The prices of these components are arguably not very relevant to the measurement of the ‘_____ __ ________’. In order to measure the living costs faced by households/consumers, we might focus only on ______ _______ and ________ which are part of consumption

Answer 6

The GDP deflator reflects the prices of all components of GDP, including investment and government purchases. The prices of these components are arguably not very relevant to the measurement of the ‘cost of living’. In order to measure the living costs faced by households/consumers, we might focus only on final goods and services which are part of consumption

Question 7

Consumer Prices Index II

The Consumer Price Index (CPI) measures the …

In the UK the ONS conducts surveys of consumers in order to determine ‘___________’ _______________. Based on the survey results the ONS then tracks the prices of specific goods and services within the representative ‘____________ _________’, over time.

Answer 7

The Consumer Price Index (CPI) measures the overall cost of goods and services bought by a typical consumer.

In the UK the ONS conducts surveys of consumers in order to determine ‘typical’ expenditure. Based on the survey results the ONS then tracks the prices of specific goods and services within the representative ‘shopping basket’, over time.