MMT 04 GNP

Chapter 4: The System of National Income and Product Accounts.

Final Exam Questions:

Many elements of the GDP are measured using index numbers. For example, GDP is measured by combing all real production using the market prices to aggregate across different types of commodities. Using the fact that index numbers are inherently arbitrary explain

1. Why some goods should not be evaluated as contributions to the GDP at market prices -- their value is much greater than the market price of these goods

2. Some goods are harmful, but get a positive price -- they count as contributions to the GDP, when in fact the production of these goods is a loss to the economy.

3. Some goods which are of extreme importance receive zero value and do not contribute to the GDP, when in fact they should be counted heavily as positive contributions.

4. Read summaries of the Mis-measurement of Man by Stiglitz Sen and Fitoussi and explain why these mistakes in calculating GDP cause immense damage. Illustrate by the case of Pakistan.

Student Answers:

1. Why some goods should not be evaluated as contributions to the GDP at market prices -- their value is much greater than the market price of these goods correct

Individual perform some environmental services which can be measured by estimating people’s willingness to pay, or the cost of actions they are willing to take, to avoid the adverse effects that would occur if these services were discontinued, or to replace the lost services or revive the services. These environmental services included; child care, elder care, upkeep, and all unpaid household services. These services should not be evaluated as contributions to the GDP at market prices even though their value is much greater than the market price of these goods, because individual perform these services by their willingness and these environmental goods and services are not traded in markets. As people cannot reveals their willingness in order to get some payment for their services.

2. Some goods are harmful, but get a positive price -- they count as contributions to the GDP, when in fact the production of these goods is a loss to the economy.

ANSWER:correct

As GDP is not necessarily a good measure of production as a contribution to economic wellbeing. for example, a factory might pollute the air and water supply while it is producing 'widgets' .the Social, health, and environmental cost associated with this production are not deducted from the value of widgets produced for the purpose of measuring GDP. However, if society had to hire workers and produce machinery in order to clean up the pollution from the widget factory, that would be counted toward GDP. Ironically, production of widgets would then count twice toward GDP, once for the value of widgets produced and secondly for the value of cleaning up the environment. May be social cost of producing wdgets is higher than its benefit, in that sense production of widgets may contributed as a loss to the economy.

3. Some goods which are of extreme importance receive zero value and do not contribute to the GDP, when in fact they should be counted heavily as positive contributions.

ANSWER:correct

GDP excludes the huge proportion of nation's production this way they get zero value. By excluding all the unpaid household services performed including cleaning, repairs and upkeep, and child and elder care.for example, washing your own dishes at home is not included in GDP. However if you hire your neighbor to wash your dishes, that should counted in GDP as dish washing services. In the first case there was no monetary exchange and no market value at which service took place. while in the second case there is market value that you paid for the service.GDP under counts the contribution made by women to production, since they perform unpaid work . GDP also excludes black market, grey market, under table transaction,and much of the production in the informal sector.

4. Read summaries of the Mis measurement of Man by Stiglitz Sen and Fitoussi and explain why these mistakes in calculating GDP cause immense damage. Illustrate by the case of Pakistan.correct

Stiglitz Sen and Fitoussi argued that, GDP is miss measurement over time particularly in its economic, environmental, and social dimensions. GDP is an inadequate measurement of some aspects of which are often referred to as sustainability. For example when there are large changes in inequality, GDP may not provide an accurate assessment of the situation in which most people find themselves. Arguments of this report are very helpful in case of Pakistan. In Pakistan inequality increases enough relative to the increase in average per capita GDP, so most people worse off even though average income is increasing.

GDP may not capture some phenomenon, which has an increasing impact on the well-being of citizens. For example, traffic jams may increase GDP as a result of the higher use of gasoline, but obviously not improve the quality of life. In case of Pakistan well-being and quality of life of people is not taken in to account because neither there is any cost of creating any type of pollution especially of air pollution nor environmental, social and health costs deducted from value of production. So by ignoring these social impacts of production provide an inaccurate estimate of what is happening to citizens’ well-being.

Each team has been assigned one section of the Chapter 04. Lecture will be delivered by class -- each group will present slides on their assigned section

DO the six tasks T1, T2, ..., T6 listed and linked below

MMT Ch 4 national income accounts — Class presentations

T1: Read Malcolm Gladwell Article, and do Quiz — Understanding the concept of index numbers in a conceptual way

T2 Chapter writeup & lecture slides for Index Numbers & ranking — Students should arrange to go over reading/slides by themselves in groups.

T3: My Video Lecture, Slides, Transcript — Watch lecture or read transcript/slides -- do not do homework on percentiles.

T4 Laspayres & Paasche Index — Do it yourself computer exercise in computation of Laspayeres and Paasche index. VERY IMPORTANT

T5: Reading on Arbitrary Rankings & Quiz — More readings to understand this very mis-understood subject

T6 Wrapup Lecture on Arbitrariness & Importance of Rankings — Lecture slides only -- can have actual lecture delivered by Nadia Hassan