What Main Measures Of Economic Activity Fail Include CPI and GDP - Essay Example

What main measures of economic activity fail do include GDP What are some of the limitations of the GDP numbers By itself the GDP tells very little.The GDP assumes that every monetary transaction adds to well-being, by definition it is a measure of total output (the dollar value of finished goods and services), it assumes that everything produced is by definition "goods." It does not distinguish between costs and benefits, between productive and destructive activities, or between sustainable and unsustainable ones. The nation's central measure of well-being works like a calculating machine that adds but cannot subtract. It treats everything that happens in the market as a gain for humanity, while ignoring everything that happens outside the realm of monetized exchange, regardless of the importance to well-being (Cobb, 1995). But GNP/GDP measures have some flaws in fully estimating economic development; the most common flaws are listed below: doesn't calculate unpaid labor, particularly women's care work. doesn't tally externalities - costs that are externalized (passed on ) to someone else. For instance, polluting factory are able to overtake on the cost of damage to health and the environment. does take into account negative goods - the clean up of a toxic waste dump is counted as a plus in terms of GDP. ignores distribution, quality of life, equality, sustainability ignores the problem of whether the world can maintain high rates of expansion given the exhaustion of non-renewable resources and environmental damage. One should not neglect the way GDP ignores the contribution of the social realm--that is, thus the economic roles of household is not taken into account. This is where much of the nation's most important work gets done. Why this happens can be explained by the fact that money do not change hands. The GDP doesn't count it at all--which means that the more our families and communities decline and a monetized service sector takes their place, the more the GDP goes up. The GDP totally disregard the distribution of income, for example, so that enormous gains at the top appear as new prize for all. It makes no distinction between the person in the secure high-tech job and the "downsized" white-collar worker who has to work two jobs at lower pay. CPI CPI is used as an economic indicator to measure inflation. The CPI is an indicator of the effectiveness of government policy, besides it is used by business executives, labor leaders and other private citizens use the index as a guide in making economic decisions. The Columbia Encyclopedia defines The Consumer Price Index (CPI), as a measurement of the cost of living prepared by the U.S. Bureau of Labor Statistics, tracks changes in retail prices of an average "market basket." Changes are compared to prices in a previously selected base year, from which figures the percentage increase or decrease in the cost of living can be calculated. In addition to changes over time, such analyses must also consider regional variations in the cost of living, and the relative weighting of the components of the index must be reappraised periodically. Despite its enhancements over the years, the CPI still has considerable problems as an inflation measure. For instance, the index overstates many individual price increases by failing to fully adjust posted price changes for quality improvements and by underestimating the growth of sales by discount retailers (Bureau of Labor Statistics, 1997). Economists take into consideration the CPI when taking time-series measurements of financial instruments, since such measurements can only sense if they are expressed in "constant" money terms. One should bear in mind that the CPI is not an economic variable, as it is statistic measure of inflation. To calculate the monthly CPI, the US Department of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a "mythical" household budget. For example, the statisticians may hold that housing costs are 30 percent of household expenditures, food costs 20 percent, gasoline another 15 percent, and so on (William, 2000). Supplementary, compromising the CPI as a measure of the cost of living is its amalgamation, in disagreement with economic theory, of the purchase price of numerous long-lasting goods, such as cars and furniture, rather than the cost of owning these items over time. It is not obvious, though, whether this practice adds to or subtracts from the CPI's hyperbole of inflation. The CPI obviously has its faults-most remarkably, it probably overstates the true speed of inflation. In sum, although the CPI does not calculate true inflation, there is no methodically viable alternatives to it as a user-friendly and fairly trustworthy guide to inflation movements. Even though problems can arise when the CPI is used indiscriminately as a measure of the cost of living, the index does offer an appropriate starting point, but should discount a few factors as well as make some adjustments. Unemployment as a measure of economic activity Nevertheless, real GDP growth is not the only measure of real economic activity of concern to market participants the unemployment rate provide alternative measure of real economic activity. Compared to GDP, which is available only after the year end, unemployment figures are available monthly and are alternative measures of real economic development. A useful purpose served by the unemployment rate in an economy, when available on at least an annual basis, is the tracking of business cycles. When the rate is high, the economy may be in recession (or worse), economic conditions may be bad or the economy somehow unable to provide jobs for the available workers. One might find a stable relationships between unemployment or other measures of economic activity and future inflation. The measurement of unemployment represents the degree to which available labor resources are not being utilized in the economy. But even though there is broad support for the official statistics when used in this capacity,(5) different interpretations of what is meant by "available labor resources" and "efficient utilization" remain, so some users find the need for a variety of measures(Bregger,1995). Unemployment measure is a bad representative of economic activity as it does not take into account seasonal layoffs (e.g., in agricultural jobs), technological changes in industry (particularly by increased automation), racial discrimination, lack of adequate skills by the worker, or fluctuations in the economy. The term underemployment is often used to describe the condition of those who work part-time because full-time jobs are unavailable or who are employed at less-skilled work than they are qualified to do, even though they are economically active. Unemployment; it is expected to be useful to those who want a single measure to represent a general view of the degree to which existing and potential labor resources are not being utilized. Bibliography: 1. Clifford Cobb, Ted Halstead, Jonathan Rowe; If the GDP Is Up Why Is America Down The Atlantic Monthly, Vol. 276, October 1995. 2. Clifford W. Cobb and John B. Cobb, Jr, The green national product: a Proposed Index of Sustainable Economic Welfare; University Press of America, 1994. 3. William L. Anderson What's Wrong with the CPI Volume 19, Number 8, August 2000. 4. Encyclopedia Article Title: Cost of Living. Encyclopedia Title: The Columbia Encyclopedia, Sixth Edition. Publisher: Columbia University Press. Place of Publication: New York. Publication Year: 2004. 5. William D. Nordhaus Beyond the CPI: An Augmented Cost-of-Living Index, Journal of Business & Economic Statistics, Vol. 17, No. 2, April, 1999. 6. Bryan, Michael F., and Stephen G. Cecchetti. 1993. "The Consumer Price Index as a Measure of Inflation." Federal Reserve Bank of Cleveland Economic Review 29, no. 3. 7. Cecchetti, Stephen G. 1996. "Measuring Short-Run Inflation for Central Bankers." Paper presented at the Conference on Measuring Inflation and Real Growth, Federal Reserve Bank of St. Louis, October. 8. Roberts, John M., David J. Stockton, and Charles S. Struckmeyer. "An Evaluation of the Sources of Aggregate Price Rigidity." Review of Economics and Statistics 76, February, 1994. 9. John E. Bregger, Steven E. Haugen, BLS Introduces New Range of Alternative Unemployment Measures, Monthly Labor Review, Vol. 118, 1995. Read More