So we've been using GDP to measure the productivity in an economy but it's not a perfect measure like most things in this world, let's go ahead and check out some of the shortcomings of G. D. P. So when we use G. D. P. To measure as a measure of statistical variable, we use it to measure two things the total production in an economy, but we also use it as a measure of the well being of its citizens. We tend to think that the higher the production the higher the output well that that leads to a higher standard of living. More things are available for the citizens. Okay let's go ahead and see how it's not perfect. First let's start here with total production in the economy. So there are some things that do not contribute to the GDP calculation but they arguably should, right. They arguably should even though they're not included. So what are some of these things? The main ones here are household production. So if someone creates something for their own use, well it's not going to be included in GDP. The value of goods, goods produced for own use will say here for own use. So let's assume there's a carpenter that builds bookshelves and sells bookshelves all the time. But then he also builds a bookshelf at home. Well if he hadn't built that bookshelf, he would have had to go out and purchase it. Right? So this should technically be included in our GDP but there's not really a way to measure it and included in the calculation. So the one he produced at home, the ones he used at home is not in G. D. P. But it arguably should be right because it was production during this year. Another thing is the services of a homemaker, right? So if there's a stay at home parent, a stay at home mom or stay at home dad, well what they do doesn't get included in GDP. However, if they had a job and they had to hire a babysitter to take care of the kids, the babysitter services would have been included in GDP. However since they're doing it themselves, they're doing they're producing this homemaker uh service themselves. It's not included in the G. D. P. Calculation. So household production are things that should arguably be included in GDP and are not. Next one is the underground economy. So this is the buying and selling goods that is hidden from the government. There's a few reasons why people might hide transactions from the government. First one is obviously if they're trading in illegal goods right? You don't want the government to know if you're selling drugs or if you're a prostitute, you're gonna get sent to jail for that. So you you buy and sell on the underground market and there's clearly a product being sold here. There's value being created when you sell drugs or something like that. That's not uh included in GDP. So these values should be included in GDP, but since they're illegal, they're not being tracked, right? Other things that other things on the underground economy, well, people are avoiding taxes. So, if you hire someone under the table, hiring under the table, well, that doesn't get included in GDP because it's being hidden from the government. They're not gonna be able to include it in their calculation and avoiding government regulations. People avoid government regulations, they hide things to avoid certain regulations. Maybe they sell some sort of asset, but they don't want to pay taxes on the sale. So they hide that information from the government. Um, So, whatever it might be, uh, those underground economy transactions are not included in GDP, but they arguably are creating value and they're being produced, right, there's final goods and services being produced there. So, does the exclusion of these two main things, Underground economy and household and household production, Does it significantly affect GDP is usefulness? Well, in the short run, we're going to see that it's generally pretty constant. So we could think that the underground economy is not changing too much, the amount of drugs that are being sold year to year is relatively constant, or the amount of household production year to year is generally pretty constant. So in the short run, since we're leaving out about the same amount each year, it's not gonna incredibly affect the calculation. However, in the long run, there are social changes that can have drastic effects, such as uh the amount of homemakers, So when we're talking about household production, the homemakers weren't being included in GDP, although they were producing something significant right there producing the equivalent of a babysitter, nanny service, house cleaning service. But in the 1970s a lot of these women who were stay at home moms entered the workforce and their production was included in GDP. Now, even though before they were technically still producing as a homemaker. Now they're producing as something that was being recorded by The government and included in GDP. So they were producing before and not being included and now producing after and being included. This is gonna affect the GDP calculation and make it seem like, wow, something happened in the 1970s, although they were producing before and producing after. Um that exclusion could have altered those calculations. Right? So let's pause here and then in the next video, let's discuss the other side of G. D. P. The well being of citizens
Shortcomings as Measure of Well-Being
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So GDP per capita is generally used to measure the well being of citizens. When we say per capita we mean per person, right? Per person in the in the population. So we say if there's more GDP per person, well that means there's more output per person. And we can say that there's more production available per person and tends to lead to an increase in the well being. However this shouldn't be the only measure of well being right because there's things that are not included in GDP that definitely account for the well being of the citizenry. So what about the value of leisure? Imagine if everyone worked all the time, no one took any breaks, everyone worked seven hours a week, 12 hour days, seven hours a week. Well GDP would be higher wouldn't it? If everyone worked all the time. But would the citizens be happier? Probably not. Right, they'd be exhausted. They probably get sick more often from overwork and it wouldn't benefit the citizens. Although GDP would be increased. Right. It wouldn't necessarily translate to happier uh better citizens. So the value of leisure is not included in GDP because the idea that if everyone just worked more GDP would increase, meaning the well being would increase. That doesn't really follow. Next is environmental effects G. D. P. Would be higher if without environmental regulations as well. So if there were no environmental regulations there would be a lot more production there wouldn't be restrictions on production and there there would be a higher GDP but does that necessarily lead to well being of citizens. Probably not right? As a as a well being. This GDP should probably be reduced for these health hazards and pollution and things like that. There should be some sort of measure of these pollutions that kind of adjust GDP for that. Next is crime and social problems. If there was more crime, there would be more government spending, right? Because more crime would lead to more police, higher government spending, we know government spending is included in GDP and that would increase GDP but there's more crime really mean a better citizens. Better citizens? Re well being of the citizens. I don't think so. Right. So you can see that these these social issues can play a part in GDP as well. Finally, one more issue with GDP is the equity in GDP. GDP is just measuring a total amount of production and saying there's this much per citizen. But is it really split evenly? There's not really a perfectly even split of GDP, right? It measures what we say, the size of the pie, right? The G D. P pie, but how is it split? I don't think everyone's getting equal slices, right? We're not getting equal slices for each citizen. Maybe we'll have some really small slices here and some really big slices, right? Maybe we've got a little tiny slice here and then a really big slice for someone else. So it measures the size of how much is being produced, but not how it's split between the citizens. So that's not a perfect measure of well being as well. So remember the two problems here with GDP is that it doesn't necessarily include all production, and it doesn't necessarily perfectly measure the well being of the citizens. Cool, Alright, let's go ahead and move on to the next topic.