everything you always wanted to know about gdp (but were afraid to ask) clas mini-college...
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Everything You Always Wanted to Know about GDP (but were afraid
to ask)CLAS Mini-College Presentation
24 May 2010
Professor Joshua L. Rosenbloom
Economic Measurement Issues
Some types of measurement seem simple—e.g., length
But others entail summarizing multiple dimensions
This is usually the case in economics
How, for example, do we summarize the activities of an entire economy?
Economists have developed a range of indicatorsGDPCPI
“No measurement without theory”
Every measurement answers a particular question
The question arises in the context of a theory
To understand the measurement we must Understand the theoryKnow what question the measurement answers
Today’s take home lessons
GDP and other economic statistics are grounded in economic theory that provides a rationale for their construction
It is possible for reasonable people to disagree about the choices that underlie the construction of these statistics
Understand what choices are embodied in official GDP statistics and why they matter
Agenda
Brief history of income measurement
Formal definition of GDP
Adjusting for the cost-of-living (real GDP)
Interpretive issues
A brief quiz
QuestionsHow big was U.S. GDP in
2009?
What was U.S. GDP per capita in 2009?
How big was China’s GDP in 2009?
What was China’s GDP per capita in 2009
Answers $14.26 Trillion
$46,400
$8.79 Trillion (Purchasing Power Parity)
Or $4.81 Trillion (Official Exchange Rate)
$6,600 (PPP)
Source: CIA World Fact Book https://www.cia.gov/library/publications/the-world-factbook/index.html
Measuring the National Economy
GDP seeks to answer the question: “How Big is the Economy?”
Efforts to answer this question began at least as early as 1665 with Sir William Petty in EnglandHe adopted a broad definition seeking to to measure
the “Annual Value of the Labour of the People” and the “Annual Proceed of the Stock or Wealth of the Nation.”
Others adopted a narrower definition In France Quesnay (1764) believed only agriculture
produced a net product
Modern Era of Measurement
There was no continuous, real-time measurement of GDP before the 1930s
Several American efforts in the 19th century Seaman in 1952 King 1915 National Industrial Conference Board began to produce annual
estimates in 1920 About the same time the National Bureau of Economic
Research produced retrospective estimates for 1909-19 The first government effort was produced by the FTC in 1926
In 1932 the Senate Called on the Secretary of Commerce to produce estimates for 1929-1932 and then to continue these going forward Intellectual leadership was provided by Simon Kuznets
Modern Definition of GDP
GDP is defined as the market value of all final goods and services produced within a country during a specified period of time
Note that GDP is a Monetary quantity – it is measured in dollarsFlow -- dollars spent per unit of time
Key features of GDP: market prices
Market prices reflect the opportunity cost of purchasing an item
Money spent on one item is not available for other things
So market prices tell us the relative value that all consumers place on different products
Key Features of GDP: Final Goods and Services
Final goods and services are those used by their ultimate consumers
Distinct from intermediate goods purchased by one producer from another
This avoids double counting
A Simple Example
Intermediate Product
Income Sales
Farmer, wheat $0 $1 $1
Miller, flour $1 $2 $3
Baker, bread $3 $4 $7
Total $4 $7 $11
Key Features of GDP: Within a Country
GDP focuses on the location of production
GNP measures income of American citizens wherever located
Key Features of GDP: Gross Product
Gross vs. NetRefers to treatment of capital depreciationNet product subtracts an estimate of investment
needed to maintain the capital stockGross product reflects focus on total available
production It is not the best measure of sustainable
consumption
Three Routes to GDP
Intermediate Product
Income(= Value Added)
Sales
Farmer, wheat
$0 $1 $1
Miller, flour
$1 $2 $3
Baker, bread
$3 $4 $7
Total $4 $7 $11
We defined GDP as a measure of goods and services produced, but… Production = Income Production =
Expenditures
So Production = Income = Expenditures We can measure the
same concept in three different ways
System of National Accounts provides these different perspectives
Real GDP
Because GDP is measured in $ it depends on bothPhysical productionPrices
To isolate changes in the physical quantity produced economists us real GDPTo do so we use a constant set of pricesBut the choice of what prices can have a big effect
Calculating Real GDP
Date Computers Everything Else
Price Quantity
Price Quantity
1980 $100
10 $9 1000
2000 $10 100 $9 2000
Prices of
Year Real GDP
2010 1980 $10x10+$9x1,000 = $9,100
2010 $10x100+$$9x2,000 = $19,000
1980 1980 $100x10+ $9x1,000 = $10,000
2010 $100x100+ $9x2,000=$28,000
How much did GDP grow?
1980 2010 Index (1980=100)
Nominal GDP $10,000 $19,000 190
Real GDP (2010 $)
$9,100 $19,000 209
Real GDP (1980 $)
$10,000 $28,000 280
But the Definition of GDP Matters
Kuznets, National Product in WartimeNational accounts are based on definite assumptions
about the “purpose, value, and scope of economic activity.”
War magnifies these conceptual difficulties by “raising questions concerning the ends economic activity is made to pursue…” and the “distinctions between intermediate and final products.”
“War and peace type products…cannot be added into a national product total until differences in the valuation due to differences in the institutional mechanisms that determine their respective market prices are corrected for.”
Which is the correct picture?
There is no one correct answer
It depends on the question we want to answer
The official series captures wartime mobilization of resourcesClearly the economy was capable of marshalling
substantial resources
But not all of these were devoted to final goods and services that directly raised welfare
These are illustrative of broader conceptual issues that have been raised by critics of GDP
Kennedy’s Critique of GDP
Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that –
that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.
Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.
These themes have been echoed by others
Not everything included in GDP appears to enhance well-beingLocks for our doors, jails, etc.
There is no deduction for environmental damage or resource depletionPollution, the destruction of the redwood
It fails to count things not traded in marketsThe beauty of our poetry, the strength of our
marriages
The Genuine Progress Indicator
Produced by Redefining Progress
Begins with the official GDP data
Makes a series of adjustmentsDeducts expenditures judged unproductiveDeducts estimates of the cost of pollution and
resource depletionDeducts for reductions in leisure timeAdds an estimate of unpaid family and household
workAdjusts for negative effects of inequality
GDP and GPI are answers to different questions
GDP asks how much is produced? It accepts the value of those goods and services to the
individuals who purchased them It doesn’t attempt to account for environmental
consequences Nor does it attempt for the most part to value non-
marketed goods
The GPI asks how does this production relate to welfare? It is one possible answer But because it inserts judgments based on non-economic
considerations it is possible to question many of these
There is no one right answer
Conclusions
There is no measurement without theory
GDP is founded on microeconomic theoryThis theory justifies the use of market pricesAnd the focus on goods and services exchanged in
markets
But it also accepts the limits that this theory imposes It cannot adequately incorporate non-market
transactionsMost importantly our transactions with the natural
environment
There is a need for better measures of sustainable production
Further Reading
U.S., Dept. of Commerce, Bureau of Economic Analysis. Measuring the Economy: A Primer on GDP and the National Income and Product Accounts (Sept. 2007) http://www.bea.gov/national/pdf/nipa_primer.pdf
Carson, Carol S. “The History of the United States National Income and Product Accounts: The Development of an Analytical Tool” Journal of Income and Wealth (1975), 153-181
Krueger, Alan B. Measuring the Subjective Well-Being of Nations: National Accounts of Time Use and Well-Being (University of Chicago Press, 2009
Stiglitz, Joseph E., Amartya Sen, Jean-Paul Fitoussi, “Report by the Commission on the Measurement of Economic Performance and Social Progress” http://www.stiglitz-sen-fitoussi.fr/en/index.htm
Redefining Progress, The Genuine Progress Indicator http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm