McConnell Economics, Chapter 7

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Jin+Guice
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McConnell Economics, Chapter 7

Post by Jin+Guice »

Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 7.

Jin+Guice
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Re: McConnell Economics, Chapter 7

Post by Jin+Guice »

Chapter 7 discusses national accounting. The ultimate measure of national accounting is GDP, which considers is a measure of a nation's total domestic output.

GDP counts only finished goods produced in the current period.

There are two ways of measuring GDP, which are expenditures and income. These two measures should theoretically be equal. 
Computing GDP through income entails adding up consumer expenditures, investments, government expenditures and net exports.
Computing GDP through expenditures sums employee compensation, rent, interest, small business and corporate profits, indirect business taxes, depreciation of capital assets and foreign factor income. 

Indirect business taxes include sales and excise taxes, business property taxes, license fees and custom duties. The foreign income factor adds the amount of income earned by foreigners supplying resources to the United States and subtracts the income earned by Americans supplying resources to the rest of the world. This moves us from GDP to GNP. Personally I find this confusing, but unless you're talking about a problem where the distinction is important, it's not a critical detail in understanding the full framework.

GDP seeks to measure output, but the dollar amount of GDP could be increased by an increase in output or inflation. To handle this problem and obtain "real GDP" as opposed to "nominal GDP" GDP must be inflation adjusted.To do this a price index is established, which compares the price of goods and services in one year to the same "market basket" in another year. Nominal GDP is then divided by this price index to make GDP comparable across years. More details and examples on this process can be found in section 7.3 of the text.

GDP has several shortcomings including: ignoring non-market transactions (aka household production), lack of data from criminal (including tax evading) activites, difficulty dealing with increased product quality or changing technology and a lack of accounting for the environmental destruction. GDP is taken as a measure in well being, but, increasing GDP (or more precisely increasing GDP per capita) doesn't always guarantee an increase in the happiness or satisfaction of citizens. As is customary in economics, these problems are acknowledged in the introduction to the topic and then ignored in all future discussion.

white belt
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Re: McConnell Economics, Chapter 7

Post by white belt »

It was good to understand all the pieces that go into GDP, because nearly all government policies related to the economy are looking maximize GDP growth over the long term.

I did a little research into alternative measurements of well-being, but it seems like there hasn't been much consensus on an ideal replacement. I think it makes sense for a developing country to focus on increasing GDP per capita because it will increase well-being to a certain level. However, I think once an a certain level of GDP per capita is reached (maybe above the global poverty level?), then an alternative measurement of well-being would be more useful.

ertyu
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Re: McConnell Economics, Chapter 7

Post by ertyu »

GDP per capita has limitations for developing countries, because often they suffer from the greatest income inequality. There would be very few extremely rich, almost no middle class, and masses and masses of destitute poor. So the average doesn't really give you much info.

Also, GDP just measures market value of goods and services you made in your country in a year. But in developing countries those "goods and services" are really resource extraction/mining. So you can have all of the middle east that has very high GDP per capita because of all the oil, but very low standard of living for large swaths of the population.

tl;dr: GDP per capita isn't even that good for developing countries, but it's all we can actually quantify. there's human development index and the like for better estimates of standard of living.

7Wannabe5
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Re: McConnell Economics, Chapter 7

Post by 7Wannabe5 »

There’s also all the “broken window” and nth degree efficiency/bureaucracy spending which contributes to GDP, but not standard of living/quality of life.

Jin+Guice
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Re: McConnell Economics, Chapter 7

Post by Jin+Guice »

GDP/ capita is a bullshit metric that's not worth focusing on as a nation.

ERE: Free yourself from the economic so you can focus on what's really important (not different at the national level).

@Ertyu's point: Average income says nothing about distribution, without which is worthless. A certain level of inequality is a convenient way to own a lot of slaves without the stigma or they responsibility to feed them.

@7w5's point: GDP is gameable and highly imperfect.

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