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 Therefore, – / = 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 up. 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 noise).

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 price. 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 26 th. 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.