CPI and the Shortcomings of GDP

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					CPI and the Shortcomings of GDP
     The Consumer Price Index
• The main measure of inflation used by Canada.
• This measure is used by the government to
  report inflation rates, and make according
  changes in programs such as CPP and OAS.
• CPI reports the price of a "market basket" of
  about 300 consumer goods and services.
    Measuring the Inflation Rate
• CPI = (Price of the most recent market basket
  in the particular year / Price estimate of the
  same market basket in base year) X 100%
• Inflation % = Year 2 – Year 1 / Year 1
• Ex. Year 2000 CPI is 113.5, Year 1999 is 110.5
• Therefore, 113.5 – 110.5 / 110.5 = 2.7%
       Gross National Product
• Differs from GDP because GNP excludes
  profits sent to foreign shareholders.
• GNP measures the output generated by a
  country's enterprises (whether physically
  located domestically or abroad) .
• GDP measures the total output produced
  within a country's borders (whether produced
  by that country's own firms or not).
• In Canada, GDP is higher than GNP, WHY?
         Shortcomings of GDP
1) Non-Market transactions:

   Some productive activities don't take place in
   the market, and as the GDP only measures
   the market value, these activities don't show
• Examples, homemakers, labour of people who
  repair own homes, black markets.
          Shortcomings of GDP
2) Leisure:

  GDP only takes the market value of output,
  therefore, LEISURE (paid vacation, holidays,
  leave time), which increases well-being and
  satisfaction, is excluded from the GDP.
          Shortcomings of GDP
3) Improved product quality:

  GDP is a quantitative and not a qualitative
  measure, and thus does not capture the value
  of improvements in product quality.
• Ex. Adjusted for inflation, a computer now
  provides more utility than 10 years ago, but it
  might equal the same GDP.
         Shortcomings of GDP
4) The Underground Economy ("black market"):

• Embedded in the economy is a flourishing and
  productive underground sector.
• Most participants engage in legal activities,
  but choose illegally not to report their full
  incomes and therefore are not counted.
          Shortcomings of GDP
5) GDP and the environment:

• The growth of GDP is inevitably accompanied
  by "gross domestic by-products" (i.e. dirty air,
  polluted water, toxic waste, congestion, and
         Shortcomings of GDP
6) Composition and Distribution of output

• GDP does not tell us what mix of goods and
  services benefit or harm society because it
  assigns equal weight to products of the same
  Some goods are enriching, others are potentially
    detrimental to society.
         Shortcomings of GDP
7) Per capita output

• GDP itself does not reflect the well being of
  people in the nation, it is the GDP per capita
  that is important.
• E.g. China's GDP in 2004 ($1938 billion),
  Denmark's ($220 billion), but Denmark's GDP
  per capita was $40,750 and China's was $1500
          Shortcomings of GDP
8) Non-economic sources of well-being

• Just as a household's income does not
  measure its total happiness, a nation's GDP
  does not measure its total well-being.
• There are many things that could make a
  society better off without necessarily raising
  GDP, e.g. crime reduction, peace.
             Test Preparation
• Chapter Six Test: Thursday April 26th.

• Complete Question #13 on Page 150, and be
  sure to understand fully questions 3, 4, 7, 8, 9,
  10, 11, and 12 as well.

• These will be used to create the test.

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