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Answers to the reading questions on (Inter)National economics - Week 4
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The answers to the reading questions on the article: 'GDP' by Coyle from week 4.
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READING QUESTIONS WEEK 44 (Inter)National economics: Macroeconomics and
economic geography
Coyle – GDP
1. What does GDP measure? In answering this question take account of the
changing measurement aims across the decades of its existence.
GDP stands for Gross Domestic Product and measures the total value of domestically
produced goods and services over a specific time period. GDP is a "gross" measure that
does not make any adjustment for the depreciation of assets. Across the decades of
existence of GDP different things were measured and accounted for GDP. In 1665 William
Petty, a British scientist and official, "produced estimates of the income and expenditure,
population, land, and other assets of England and Wales, with the aim of assessing the
country's resources to fight a conflict and finance it through taxes." (Coyle).
Throughout the eighteenth century a number of successive statistical pioneers built on
these first British attempts. Later authors emphasized different aspects of the economy.
Daniel Defoe thought that the key to the nation's prosperity was increasing trade, both
overseas and within the country. In 1746 an anonymous author had written that National
income is what the whole body of our people get or receive from Land, Trade, Arts,
Manufacturers, Labour, or any other way. Thirty years later in Adam Smith's definition he
concluded that only those involved in the making of physical commodities, agriculture
and industry, would count toward national income. In his view the provision of more
services was a cost to national economy.
Throughout the 1920s and 1930s Colin Clark calculated national income and expenditure
by providing detailed splits of production and expenditure into different categories and
published thorough accounts of the government's finances, too. He discussed how to
adjust the figures for inflation, and also the distribution of income among different
categories of people.
During the 1930s countries were separately developing the concept and measurement of
GDP. (Coyle) From the 1940s onwards Keynes book The General Theory of Employment,
Interest and Money became the basis for a more interventionist approach to government
economic policy. The introduction of fiscal and monetary policy to target a higher and
less volatile rate of growth for the economy became the focus. The development of GDP
and its inclusion of government expenditure made Keynesian macroeconomic theory the
fundamental basis of how governments ran their economies in the post-war era.
Until the late nineteenth century the distinction between productive activity, labour
which adds value to the subject upon which it is bestowed, and unproductive activity,
which has no such effect, dominated economic debate and measurement. This was the
case till the collapse of communism after 1989. Then the new generation of
"neoclassical" economists discarded the distinction between productive and unproductive
activities. Alfred Marshall said "Wealth consists of material wealth and personal or non-
material wealth."
, READING QUESTIONS WEEK 4
2. What should GDP measure according to you? Give arguments for your
position. And say also what should be “accounted” for to have it measured what
you would like to be measured.
Gross Domestic product measures output and is not a measure of welfare. I think GDP
should continue to measure output as it does not reflect the well-being of an economy.
An economy with a high GDP could be focused on production and have little other public
services such as education and health care for the well-being of its people. Whereas
perhaps a country with less output may have better public services and possibly less
pollution which implies a better well-being for the people. The United Nations took on the
responsibility for setting international standards of measurement in what is now known
as the System of National Accounts. In the System of National Accounts 1993 is written:
"movements of GDP on their own cannot be expected to be good indicators of changes in
total welfare unless all the other factors influencing welfare happen to remain constant,
which history shows is never the case." (System of National Accounts, 1993) That GDP is
not a measure of well-being was reinforced in 2008: “An individual’s state of well-being,
or welfare, is not determined by economic factors alone." (System of National Accounts,
2008)
There is nominal GDP and real GDP. Real GDP is nominal GDP adjusted to inflation. I
believe that GDP should always be adjusted to inflation in order to give a good
impression of changes in output and prices over time. To calculate real GDP statisticians
have to collect data on prices and combine that into a general price index, the GDP
deflator. To calculate the price index countries should create a basket of goods with
products that are used on a daily basis and of which prices do not fluctuate too much,
which is the case with oil. Then each product in the basket is given a "weight" to reflect
how significant it is in the economy. The prices of these goods can then reflect the prices
of goods in general and can be compared to the basket of the previous years to find the
average change in price level.
3. Key to the understanding and use of GDP is the way production is defined.
How is production defined in national accounts?
GDP is a measure of production. The level of production is important because it largely
determines how much a country can afford to consume and it also affects the level of
employment. When GDP is greater it means there is more output, which implies
production was higher and therefore employment must have been higher.
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