Kennedy P. E. Macroeconomic Essentials. Understanding Economics in the News 2000 / 2.3 GDP as Gross Deceptive Product

Macroeconomic Essentials. Understanding Economics in the News 2000
Authors: Kennedy P. E.
Published year: 2004
Pages: 16-17/152



		6. Cross-country comparisons are rendered difficult by several factors: some countries spend a lot on housing to deal with a harsh climate; leisure-loving societies do not have their leisure valued; exchange rates used to express GDP figures in common currencies do not accurately reflect cost-of-living differences; and differences in income distributions are ignored.



		Despite these problems in using GDP to measure an economy's welfare and to compare it to other economies, most economists are comfortable using GDP figures for comparisons over time, such as measuring an economy's growth rate. So long as the size of the underground economy is stable, there are no dramatic changes in crime and pollution, and the fraction of an economy's economic activity that appears on markets is relatively constant, growth measures should paint an adequate picture of economic progress.



		But economic growth is not the only way of measuring progress, and many believe that the high profile of GDP has served to divert attention from other forms of human progress. One respected alternative measure is the human development index, developed in 1990 by the United Nations Development Programme. It is an index calculated as an equally weighted average of relative performances on measures of life expectancy, educational attainment, and income. Canada and the United States are the top countries by this measure.



		Just as a company would be unwise to chart its course by looking at its cash flow without looking at its balance sheet, so would a country be unwise to focus on GDP without looking at its its worth. The World Bank has ranked countries by per capita wealth, calculated by estimating the value of each country's natural resources, machinery, buildings and other man-made capital, and human resources. By this measure the wealthiest countries are those with few people and lots of oil, like the United Arab Emirates, and countries with few natural resources but substantial human ingenuity, such as Switzerland. Resource-rich Australia and Canada top this ranking; the United States is twelfth, just behind Norway.



		One of the most prominent ways in which GDP changes can be misleading is if the effects of overall price changes on this measure are not taken into account. Doing so produces the important distinction between real and nominal GDP.



		One way the GDP measure can increase is if the nation produces a larger physical quantity of goods and services, implying that more goods and services are available for distribution to participants in the economy. Such a change would be of importance to our standard of living. But GDP can also change simply because the prices of all goods and services rise, as they do during an inflation. In this case a larger GDP does not correspond to a larger physical quantity of goods and services. Typically, each year GDP increases for both reasons, so some way of distinguishing changes in GDP due to physical changes in output from changes due to price level changes must be found.

Table 2.2 Nominal and Real GDP
Year	Nominal GDP (billions of current $)	GDP Deflator (1992 = 100) (chained)	Real GDP (billions of 1992 $)
1990	5,743.8	93.60	6,136.3
1991	5,916.7	97.32	6,079.4
1992	6,244.4	100.00	6,244.4
1993	6,558.1	102.64	6,389.6
1994	6,947.0	105.09	6,610.7
1995	7,269.6	107.51	6,761.7
1996	7,661.6	109.53	6,994.8
1997	8,110.9	111.57	7,269.8
Source: Economic Report of the President, 1999.
www.access.gpo.gov/eop/



		Inflation is defined as a persistent rise in the general price level. This price level is usually measured by the consumer price index, the CPI, a price index designed to reflect growth in prices of consumer goods and services. If the prices of all consumer goods and services rise by 10 percent, the CPI rises by 10 percent to reflect these increases. The CPI is calculated by observing changes in the cost of purchasing a typical bundle of consumer goods and services. As the cost of buying this bundle rises (falls), the CPI rises (falls). Thus the CPI is a weighted average of all consumer prices, with the weights given by the relative importance of different goods or services in the typical bundle of purchases. A survey of the prices of about 80,000 items is used in calculating the CPI each month. The typical bundle currently in use is based on results from a national survey (the Consumer Expenditure Survey) of almost 36,000 people undertaken during the years 1993 to 1995. This bundle is divided into eight general categories; the following list gives their approximate weighting and examples of their components.



		1. Food and beverages (16%): breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks.



		2. Housing (40%): rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture.



		3. Apparel (5%): men's shirts and sweaters, women's dresses, jewelry.



		4. Transportation (18%): new vehicles, airline fares, gasoline, motor vehicle insurance.



		5. Medical care (6%): prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services.

Macroeconomic Essentials. Understanding Economics in the News 2000
Authors: Kennedy P. E.
Published year: 2004
Pages: 16-17/152

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