Difficulties in Measuring GDP

GDP is the value of goods and services produce in a country during the time period of year.
Measuring of economy on GDP standards consist some drawbacks.
Double Counting Problem
Including the price of intermediate goods individually and with final product.
Self doing activities
Unrecorded economy in personal activities like the duties performed by oneself, housewives etc
are not included in the GDP.
Illegal Economy
The economy which can be shown incorrectly due to corruption,bribery and drugs business.
Statistical Errors
People measuring the economy not performing their duties with honesty or the standard they are
using are not current to measure the accurate value of GDP.
Pollution Factor
Pollution factor can’t be included in GDP.
Facilities and living standards
facilities and living standards improvement can’t be indicated by GDP, to show whether the
people of the country are worst off or well off.
Quality Improvement
As the time passes quality improve with speed as compared to the price, GDP can only measure
the price as value but not quality.
There are three ways of measuring GDP:
 the income approach, which measures GDP by summing the incomes accruing
from production: compensation of employees (wages and salaries, and
employers' social contributions); gross operating surplus (profits); gross mixed
income (income from unincorporated businesses, including a return to the
owners of these businesses for their labour); and taxes less subsidies on
production and imports;
 the expenditure approach, which involves summing all final expenditures on

goods and services (i.e. those goods and services which are not processed any
further), adding on the contributions of changes in inventories and the value of
exports, and deducting the value of imports. Final expenditures consist of final
consumption expenditure and gross fixed capital formation. Exports are included
in GDP because they are part of Australian production even though they are sold
to overseas purchasers. Imports are deducted because, although they are
included in final expenditures (e.g. when someone buys an imported video
recorder its value is included as part of household final consumption
expenditure), they are not part of Australian production; and
 the production approach, which calculates GDP by taking the value of goods
and services produced by an industry (its output at basic values, which implicitly
includes taxes less subsidies on production) and deducting the cost of goods and
services used up by the industry in the productive process (intermediate
consumption), which leaves the value added by the industry. GDP is then
obtained by summing value added across all industries, and adding taxes less
subsidies on products
Econ. 3244 – Study Topics #1
Refer to the following questions while studying “subject sequence and text assignments” #2 (course
syllabus). Make notes and be prepared to discuss these questions in class.
2. Basic macroeconomic measures
a. Measuring GDP -Ch. 2, pp. 24 – 37 (5 th Ed.); pp. 23 – 37 (6th Ed.)
1. Define “gross domestic product” (GDP).

2. What are the three ways of measuring (calculating) GDP?
3. If we calculate GDP for an economy using each approach, would we expect to get the same
numerical answer? Why or why not?
4. In the product approach to measuring GDP, why are only “newly produced” and “final”
goods and services counted?
5. In the expenditure approach to measuring GDP, what does each of the following symbols
mean: C I G NX
6. In the expenditure approach, what major outlay by many households or individuals is not
classified as a consumption expenditure? Where does this outlay appear in the expenditure
approach to measuring GDP?
7. In the expenditure approach, what type of major government outlay is never directly
included in measuring GDP?
8. In the expenditure approach, can the NX term be negative? If so, what is the
interpretation / significance of a negative value of NX?
9. How are changes in business inventories of unsold goods handled in the expenditure and
product approaches to measuring GDP?
10. What are the eight broad components of GDP as measured by the income approach?
11. Why are “transfer payments” (e.g., social security payments) and “pure financial
transactions” (e.g., buying or selling common stock) never included in measuring GDP?
12. Explain the concepts of (1) private disposable income and (2) net government income.
b. Real GDP, price indices, inflation, nominal and real interest rates -Ch. 2, pp. 46 – 54 (5 th Ed.); pp.
46 – 55 (6th Ed.)
13. What is the difference between nominal and real GDP?
14. In general, what is a price index?
15. Specifically, what two price indices are most relevant to studying macroeconomics?
16. How is a price index used to convert “nominal” values to “real” values (formula)?
17. If the value of a price index increases over a given time period, what does this tell about
changes in relevant prices during that period?
18. How can price index values be used to measure the rate of inflation (formula)?
19. How can real GDP values be used to measure the rate of economic growth?
20. What is the “base year” of a price index series? What will always be the numerical value of
the price index in the base year?
21. What is a nominal interest rate; a real interest rate? If you have the value of either of these,
how would you determine the value of the other?
c. Labor force, unemployment, and labor force participation -Ch. 3, pp. 94-101 (5 th Ed.); pp. 93 – 100
(6th Ed.)
22. What criteria must a person meet to be included in the calculation of labor statistics?
23. What are the three categories into which a person may be assigned for purposes of
calculating labor statistics?
24. What are the four key labor statistics? How is each of them calculated?
25. Briefly explain: “frictional” unemployment; “structural” unemployment; “cyclical”
unemployment.
26. Explain why it is reasonable to say that the economy is at “full employment” even though
the unemployment rate is not zero (say it’s 5%).
27. Suppose an economy’s “natural” rate of unemployment is judged to be 5% and the

economy’s real output at that unemployment rate is $10 trillion. Using Okun’s Law (p. 99 –
100), by what percentage will real output fall if the unemployment rate increases from 5% to
7%, and what would we expect real output to be ($ tril.) with an unemployment rate of 7%?

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GDP is the value of goods and services produce in a country during the time period of year.

Measuring of economy on GDP standards consist some drawbacks.

Double Counting Problem

Self doing activities

Pollution factor can’t be included in GDP.

Facilities and living standards

There are three ways of measuring GDP:

 the expenditure approach, which involves summing all final expenditures on

Econ. 3244 – Study Topics #1

2. Basic macroeconomic measures

a. Measuring GDP -Ch. 2, pp. 24 – 37 (5 th Ed.); pp. 23 – 37 (6th Ed.)

1. Define “gross domestic product” (GDP).

13. What is the difference between nominal and real GDP?

14. In general, what is a price index?

27. Suppose an economy’s “natural” rate of unemployment is judged to be 5% and the

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