CURRENT OUTPUT GDP consists of the value of output currently produced. It thus excludes transactions in existing commodities, such as old masters or existing houses. We count the construction of new houses as part of GDP, but we do not add trade in existing houses. We do, however, count the value of realtors’ fees in the sale of existing houses as part of GDP. The realtor provides a current service in bringing buyer and seller together, and that is appropriately part of current output.
PROBLEMS OF GDP MEASUREMENT GDP data are, in practice, used not only as a measure of how much is being produced but also as a measure of the welfare of the residents of a country. Economists and politicians talk as if an increase in GDP means that people are better off. But GDP
data are far from perfect measures of either economic output or welfare.
There are, specifically, three major problems:
•Some outputs are poorly measured because they are not traded in the market. If you bake homemade pie, the value of your labor isn’t counted in official GDP statistics. If you buy a (no doubt inferior) pie, the baker’s labor is counted. This means that the vastly increased participation of women in the labor force has increased official GDP numbers with no offsetting reduction for decreased production at home. (We officially measure the value of commercial day care, but taking care of your own kids is valued at zero.) Note, too, that government services aren’t directly priced by the market. The official statistics assume that a dollar spent by the government is worth a dollar of value. GDP is mismeasured to the extent that a dollar spent by the government pro-duces output valued by the public at more or less than a dollar.
•Some activities measured as adding to GDP in fact represent the use of resources to avoid or contain “bads” such as crime or risks to national security. Similarly, the ac-counts do not subtract anything for environmental pollution and degradation. This issue is particularly important in developing countries. For instance, one study of Indonesia claims that properly accounting for environmental degradation would reduce the measured growth rate of the economy by 3%.
It is difficult to account correctly for improvements in the quality of goods. This has been the case particularly with computers, whose quality has improved dramatically while their price has fallen sharply. But it applies to almost all goods, such as cars, whose quality changes over time. The national income accountants attempt to adjust for improvements in quality, but the task is not easy, especially when new products and new models are being invented. Attempts have been made to construct an adjusted GNP series that takes account of some of these difficulties, moving closer to a measure of welfare. The most compre-hensive of these studies, by the late Robert Eisner of Northwestern University, estimates an adjusted GNP series in which the level of real GNP is about 50 percent higher than the official estimates.
INFLATION AND PRICE INDEXES
GDP would be easy to measure if all we consumed was pie. One year GDP would be 1,000 pies; the next year 1,005. Unfortunately, life is beer and skittles. You can’t add a pint of beer to a game of skittles, but if the price of a pint is a dollar and a game of skittles costs 50 cents, you can say that a pint and a game adds $1.50 to GDP. Now sup-pose that next year all prices double: a pint and a game add $3 to GDP, but clearly noth-ing real has changed. While the dollar value of GDP has doubled, the amount of goods produced which is what we care about is unchanged. Real GDP measures changes in physical output in the economy between differ-ent time periods by valuing all goods produced in the two periods at the same prices, or in constant dollars. Real GDP is now measured in the national income accounts at the prices of 2005. Measuring inflation would be straightforward if prices of all goods grew proportionately. However, when the price of one good grows faster than the price of another, consumers shift purchases away from the now relatively more expensive good toward the less expensive one. The use of chain-weighted indexes helps correct for changes in the market basket. Nominal GDP measures the value of output in a given period in the prices of that period, or, as it is sometimes put, in current dollars. Thus, 2010 nominal GDP measures the value of the goods produced in 2010 at the market prices prevailing in 2010, and 1929 nominal GDP measures the value of goods produced in 1929 at the market prices that prevailed in 1929. Nominal GDP changes from year to year for two reasons. First, the physical output of goods changes, and, second, market prices change. Changes in nominal GDP that result from price changes do not tell us anything about the performance of the economy in producing goods and services. That is why we use real rather than nominal GDP as the basic measure for comparing output in different years. If all prices change in fixed proportion, say, every price doubles, then any reasonable price index will also change in that proportion. When some prices rise more than others, different price indexes will differ modestly according to how the different prices are weighted. Such differences are generally inconsequential for understanding macrotheory.
Written by: Adetoro Abdulhakeem
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