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Figure 18.7 (Macro 5) Comparison of Measures of Inflation

Figure 18.7 (Macro 5) Comparison of Measures of Inflation

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Stocks versus flow variables

• GDP, Income, and inflation rate are flow


Unemployment, Wealth, and Savings are

stock variables.

Copyright â 2001 by H


Distinguishing Between Stocks and Flows

Copyright © 2001 by H


4. Shortcomings of the GDP Measure

4a. Revisions in GDP occur periodically because

of the unevenness of data collection. Also, changes

in the base year occur at about 5-year intervals.

4b. Omissions from GDP occur because of

difficulty in measurement or the absence of price

information on the good or service.

4b1. Home production is not included because

these activities are simply not reported. Market

values of these activities are in most cases

available but because no spending occurs, GDP

tends to understate the value of production.

Copyright © 2001 by H


Shortcomings of the GDP Measure

4b.2 Leisure activity is similarly valuable, but no attempt is

made to account for it in GDP.

4b.3 The underground economy is estimated to be about 10

percent of GDP in the United States and even larger in other

countries. Because it is believed to be fairly constant over time,

its consequences for growth are probably minor.

4b.4 As products improve, GDP should reflect the quality

improvements. This has occurred in the case of some but not all

goods and services.

Copyright © 2001 by H


Shortcomings of the GDP Measure

• 4c. It is important to understand that even a perfect measure of

GDP, although essential to the well-being of individuals, is not a

sole measure of other aspects of the well-being of a society.

• 4c.1 Although vital statistics have improved along with increases

in real GDP per capita in the United States, there remain serious

areas of concern that are to some extent related to the rise in real

GDP. These include, for example, increases in the death rates

from AIDS, suicide, and murder among young people.

• 4c.2 Similarly, although there have been improvements in

environmental quality, and these improvements account for

about $100 billion of GDP, the level of GDP is not itself an

indicator of environmental quality.

Copyright â 2001 by H


5. International Comparisons of GDP

5a. In any attempt to compare GDP between

countries, some account must be taken of differences

in prices. Adjustment for GDP based on exchange

rates makes some improvement in the comparison of

GDP figures. However, if we wish to determine the

value of GDP in another country, some information

on the price differences of goods is needed.

Copyright â 2001 by H


5. International Comparisons of GDP

5b. Purchasing power parity exchange rates

attempt to adjust exchange rates for

differences in the prices of goods across

borders through the use of a ratio of price

indexes. The exchange rate is adjusted to

reflect this ratio.

Copyright â 2001 by H


5. International Comparisons of GDP

5c. Once this adjustment is made, international

rankings of countries based on GDP or per capita

GDP tend to fluctuate as exchange rates vary,

while the corresponding prices do not. Despite

their variability due to exchange rate fluctuations,

purchasing power parity exchange rates provide a

better basis for international comparisons than an

adjustment based solely on exchange rates.

Copyright © 2001 by H


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Figure 18.7 (Macro 5) Comparison of Measures of Inflation

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