GDP measurement issues

Comparing GDP between countries Can we compare $18.1 trillion for the US with $11,212 for China These figures are based on the price goods are sold at in each country Any problem with this? Prices are higher in the US, so that eg 1 hamburger may be $3 in the US but only $1.50 in China Should GDP in China be measure as half the US CountrySize ($billion, 2015) United States18,125 China11,212 Japan4,210 Germany3,414 United Kingdom2,853 France2,470 India2,308 Brazil1,904 Italy1,843 Canada1,616

Purchasing Power Parity GDP can be measured with an adjustment called PPP From the OECD, “PPPs are the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. In their simplest form, PPPs are simply price relatives that show the ratio of the prices in national currencies of the same good or service in different countries. “ So PPP is an adjustment which allows comparison of real GDP between countries by adjusting for the difference in prices between countries

Does GDP measure output accurately Measuring GDP is a very complex process and mistakes may be made Measuring the output of the public sector is difficult Conservatives want to reduce money spent on public services without reducing services (so income will fall but output may not…..) Does GDP include all goods and services? Are any missing in developing countries? Home produced goods – subsistence farming – produced for own consumption and therefore not measured Developed countries Hidden economy where cash is paid and incomes not declared DIY What about housework, families looking after children

Comparing GDP over time Should only look at real GDP Key issues are eg quality of goods, composition of GDP (defence does not improve the standard of living, whilst investment lowers living standards today) Quality of goods An iPhone 6 today costs about the same today as the original iPhone, yet you all want it. It must be better… Cars are better than 50 years ago, but might even be cheaper in real terms If public sector output is measured by how much we pay staff, then since wages have risen does this really mean it is better (and for that matter doctors are paid better in other countries)

Comparing GDP over time Defence Defence spending may make us feel secure, and allow our economy to grow, but spending many billions on an aircraft carrier adds to GDP but not to living standards Consumption and investment Investment means producing more machinery and equipment (investment is defined as additions to the capital stock) This enables more goods to be produced in the future, but at the expense of goods today

Comparing GDP over time Externalities (Theme 1) Economic activity may mean costs which are not taken into account like pollution, or global warming Growth should really be adjusted for this GDP and happiness Does an increase in GDP really make us happier Should/is National Happiness an objective