why can statistical discrepancy not be a good measure in the true error of computing the GDP
- both the income and expenditure approach could be underestimated (lower than what it actually is)
- then you wouldn’t be able to see it in the discrepancy error
what are the 2 main sources of error that you need to be aware of
- From the difficulty of measuring the value of non-market goods produced
- Ability of GDP to measure the standard of living
what is the error from the difficulty of measuring the value of non-market goods produced
- Non-market goods are those produced in the underground economy and those goods and services that are produced without being sold on a market
- The underground economy includes illegal activities, or legal activities that aren’t reported so taxes can be evaded
- Goods and services that aren’t sold in markets are things like fixing our houses, cooking, etc.
- Statistics Canada can estimate the size of the underground economy, but its difficult tot estimate household production
what is the error of the ability of GDP to measure the standard of living
- Ex. even if the quality of education or the health care system is an important factor that contributes to the well-being of an economy, its not taken into account in the GDP
- Same thing for the quality of the environment (air, water, etc.), the level of income inequality, etc.
what is the purpose of quantity indexes
to measure the change in the value of a basket of goods at constant prices
what does the passche quantity index do
fix the prices to the current period
what is the real value/value at constant prices
when the value of a set of goods for different periods is computed using the prices of the same period
what does the passche quantity index do
uses the prices of the base period
how much is one period for monthly data
1 month
why is there an issue with the Laspeyres and Paasche quantity indexes
- they are both based on the value of a basket of goods using prices from a distant period
- Ex. the 1990 Paasche quantity index is the value of the goods purchased in 1980 at the price of 1990
- Since the quality and specificity of goods change rapidly, it makes no sense to value them using prices from distant periods
- Ex. computers in 1990 were very slow compared with the ones we have today
- The price for a personal computer could be over $4k
- Should we use that price to value today’s computer?
what is the solution the issue with the Laspeyres and Paasche quantity indexes
- The first solution was to keep changing the base year, but when to change it?
- Now the solution is to never use prices and quantities that are separated by more than 1 period
- 1 period is determined by the frequency of the data
how much is one period if the frequency of the data (observation) is 5 years
5 years
how much is one period for quarterly data
1 quarter
what are price indexes in comparison to quantity indexes
they are like quantity indexes, but the quantities are held fixed instead of prices
what does the paasche price index do
hold the current basket of goods fixed
what is the fisher quantity index theory
the theory that the ideal index should be between the Paasche and the Laspeyres
what does a higher price index mean
it means that a given basket of goods cost more
what is the objective of price indexes
to measure the change in value of a fixed basket of goods
what is real GDP
- makes production/output/quantity remain constant even when prices are changing
- so an increase in real GDP is an increase in production not price
what does the laspeyres price index do
has the basket of goods from the base period that is fixed
what does the value of real GDP depend on
- the base year
- ex. the value of 1994 real GDP with the base year of 1992 is 739.5, but the value of the same year with the base year of 1990 is 714
how are nominal variables measured
they are measured based on current prices
what is nominal GDP measuring
measuring economic activity at current price
what happens to nominal GDP when prices increase
nominal GDP will also increase even if production is the same
