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 110.5
• Therefore, 113.5 – 110.5 / 110.5 = 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 26th.
• 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.