This can eventually limit the amount of natural resources readily available to a country, and cause harm to the agricultural products that make up a portion of the GDP. Econ-Ch. As Robert Kennedy put it in his famous election speech in 1968, “it [GDP] measures everything in short, except that which makes life worthwhile.”Environmental degradation is a significant externality that the measure of GDP has failed to reflect.
Modern economies need a better measure of welfare that takes these externalities into account to obtain a truer reflection of development. Broadening the scope of assessment to include externalities would help in creating a policy focus on addressing them.GDP also fails to capture the distribution of income across society – something that is becoming more pertinent in today’s world with rising inequality levels in the developed and developing world alike. Gross Domestic Product is essentially an indicator of aggregate economic activity.In addition to that it is also frequently used to describe social welfare. there is a large gap between those who are paid high income and those paid low, will have a large proportion of people of low income which is lower than the average GDP per capita compared with a country with higher income distribution. These limitations of GDP, as with the lack of information regarding wealth disbursement and the impact producing high quantities of goods and services has on the overall well-being of the people, are why GDP alone typically fails in providing a well-rounded, truthful picture of a country and its economy.Every country has what is known as an “underground economy,” which is defined as transactions between two parties that are not reported to the government.
Potential GDP represents the economy’s maximum sustainable level of economic activity.
The consumer price index, or CPI, is the most widely used measure of a country's rate of inflation, but it has come under fire as being less than ideal. short termjoblessness arising from mismatches between workers' skills and employers' skill requirements or between workers' and employers' locations, generates long term unemploymentWhat influences the level of structural unemployment?Periods of cyclical unemployment are times of depressed output -- the economy could produce more at fully employment (potential GDP)What happens when the ur falls below the natural rate of unemployment?the percentage rate of change in price level over timeSeries of numbers used to track a variable's rise or fall over timevalue of variable in current period/base period x 100measure of the cost, through time, of a market basket of goods and services purchased by a typical householdprice of a basket of goods and services in the current year/base year x 100The consumer expenditure service (CE) is used to find out what consumers buy (the basket), the basket is currently updated every 2 yearsnew and used goods, imported and domestically produced g&s, rent and owner's equivalent rentG&S purchased by businesses, government, and foreigners, house prices (only rents or rental equivalents), financial asset prices (stocks, bonds, etc), credit costs (interest rates, etc)To convert money values between periods, to index money payments or money values for inflation, and to convert nominal values to real valuesAmount in current dollars = amount in time t dollars x cpic/cpitAdjusting for inflation costs of living adjustmentsThe interest rate without correcting for inflation, reported or quoted interest rated are nominalThe CPI is commonly thought to overestimate the rate of inflation by about 0.5-1% per yearSubstitution bias, introduction of new goods, changes in quality, growth in discountingCPI cannot account for this substitution because it uses a fixed basketIntroduction of new goods and services, rapid price declinesIt is generally thought that quality changes lead the CPI to overstate the rate of inflation- an increasing share of consumer expenditure is made at Walmart, Target, and other discount stores rather than traditional department stores- the BLS now conducts the Consumer Expenditure Survey every two years instead of 10, reduces biases from substitution and the rapid price decline of new goodsCPI falls short of assessing our true goal of finding the measure of the cost of achieving a constant level of utility because it does not take into account the utility generated directly by the new goods and servicesa measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 (nom/real x 100)- one way to measure the economy's inflation rate is to compute the percentage increase in the GDP deflator from one year to the next - confusion and inconvenience (inflation changes the yardstick we use to measure transactions, which requires us to collect new price information in order to compare prices -- true for both consumers and businesses)the resources wasted when inflation encourages people to reduce their money holdings- if inflation is stable, future inflation rates can be forecast reasonably accuratelyClassical model: economy has returned to full employment/potential GDPKeynesian model: shocks generate the business cycleTheory that nominal and real variables can be modeled separatelyproposition that changes in the money supply don't affect real variables