Week 1: What GDP captures and what it misses Flashcards
What are the limitations of GDP? (6)
Prices are not values
Nonmarket activites are excluded
The shadow economy is missing
Environmental degradation isn’t counted
Leisure doesn’t count
GDP ignores the distribution
“GDP does not allow for the health of our children”
“GDP does not allow for the quality of their education”
True or False?
Both false
GDP does include all healthcare + education spending
In the UK, the ONS also accounts for the quality of these services
Explain the GDP limitation that prices are not values.
Market prices for many services (eg google search) are very low, but many customers would place a high value on these services
therefore, they don’t contribute much to GDP, but probably do generate a lot of surplus
Explain the GDP limitation that nonmarket activities are excluded.
For example, daycare services count towards GDP but unpaid childcare by parent/fam/friends does not
Nonmarket work contributes a lot to economic activity, this work is real economic activity but doesn’t contribute to GDP
Explain the GDP limitation that the shadow economy is missing
the shadow economy = economic activity outside of the view of gov
includes drug markets, as well as other illicit trade
also includes busking, babysitting etc
Explain the GDP limitation that environmental degradation isn’t counted.
in the production process, there can be environmental harm when getting materials
The ONS produces environmental accounts that aim to make adjustments for environmental loss and degradation incurred in production.
Explain the GDP limitation that leisure doesn’t count
when you take time off work, this reduces the time you spend contributing to value added and GDP
generally, you only want to work up to where the value of your work matches the value of your opportunity cost
working more than that might increase GDP, but would make you worse off
Explain the GDP limitation that GDP ignores the distribution
GDP is a measure of mean income
increases in income for the highest earners can have a big impact on GDP, even if most families see no increase in income at all
over time, incomes across the distribution generally move with GDP, but this isn’t always true
Despite the GDP limitations, what is the compelling underlying logic to it?
it is a measure of living standards
GDP per person measures avg income in a country, higher income makes it easier to invest in child’s health for eg
thus, it’s not that GDP measures what matters, but rather that it measures the resources that a society has available to pursue what matters
if we use resources well, then people living in countries with high GDP per person will live happier lives
