Difficulties in interpreting figures of Real GDP

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  • Created by: Jade
  • Created on: 13-12-12 10:40

Population growth

  • Economists can eliminate that a rise in output may be exceeded by a rise in population.
  • More people to share the output - on average each person will be worse off 
  • So, what economists often assess is real GDP per capita - found by dividing real GDP by population 
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Informal economy/black economy

  • Informal economy - economic activity that is not recorded or registered with the authorities in order to avoid paying tax or complying with regulations, or because the activity is illegal. 
  • It's existence means that the country's output is higher than offical real GDP figures suggest e.g. plumbing, building - often cash in hand. 
  • Distorts a range of economic data 
  • Rate of inflation in the informal economy is usually much lower than the rest of the economy - means official measures overstate inflation. 
  • Understates employment 
  • Tax revenue is lower than it would be if all economic activity was taxed 
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Real GDP and living standards

If more is produced but the extra output consists of CAPITAL GOODS, people will not immediately feel better off, although they will be in the long run.

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Output may only rise because of an increase in what economists called 'regrettables'.

E.g. the rise in real GDP has been accounted for by increasing the police force to match rising crime, people may actually feel worse off.

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Positive and negative externalities

  • Official figures do not include positive and negative externalities.
  • If pollution rises, GDP does not fall, even though people will experience a lower quality of life. 
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