III. Money vs. Real GDP (taking inflation out of financial data)
A. A Price Index measures price changes for a
basket of commonly
over a period of years.
1. One year is chosen as
a base year, set equal to 100 and years
before and after are expressed as a percent of the base year.
2. For convenience all
index calculations are multiplied by 100
allowing the percent sign to be dropped.
3. Two important indexes
are the Consumer Price Index (CPI) and
the Producer Price Index (PPI) which respectively measure the
inflation associated with consumer and producer goods.
B. An index can be used to determine whether someone's
a consumer good, and
other items of interest have changed more
or less than inflation.
1. Nominal salary is salary
measured in current dollars.
2. Real salary is salary
adjusted for inflation.
C. This example uses actual consumer price changes and
the base year (PB).
The item of interest could be someone's salary,
the price of a new car,
etc. (PC is price in current year).
||Cost of a
basket of goods
Item of Interest (x) Average Weekly Earnings1
||x in 1982
||Pb = $592
is from page 360 of the 2000 Economic Report Of The President
|Analysis: After adjusting for inflation, it is apparent the
item of interest (salary) did not keep up with inflation.
This person was making one hundred and fifty-three 1982 dollars less in 1984
than they were making in 1980.
National Income Account Data
A. Comparing data over
time requires adjusting for inflation, population
increases, and number of people
working, and quality of goods produces.
As the chart to the right
people think government
adjustments distorts government statistics.
B. National income accounts do not count
leisure time and nonmarket transfers
C. Positive and negative
effects of economic activity upon the environment are
not measured by national
(GPD) attempts to make up for important
not measured by GDP.
Analyzing durable goods over time, from
seeking alpha 7/26/13
Attempts to measure the quality of goods, value of
services and the
volume of the underground economy are poor at best and
if they are a growing portion of economic activity; the degree to which GDP underestimates
economic activity will grow increasing middle class anxiety,
Vehicle Age Demonstrates GDP Failure to Measure
1. Estimated value of new vehicles added to GDP is understated
as is the wellbeing of the owner.
2. GDP from used vehicles severely understated as is the wellbeing of new often
middle income owners.
3. GDP also doesn't measure the gain to medium income owners from no-fault
The ability of GDP to adequately measure
total U.S. economic activity and the resulting wellbeing has decrease
dramatically over the last one-hundred years. Its undervaluation of economic
activity has grown. This has resulting in productivity growth being
undervalued. The inability to measure product quality and the value of services
has added to the problem. GDP's ability to adequately measure the value of
automobiles, TVs and Smart Phones will be contrasted.
automobile and its related infrastructure and TV were
easily measured by GDP. The auto production increased employment dramatically. TV
production increased employment somewhat but production techniques improved
lowering both cost and
employment dramatically as
did the contribution to GDP and productivity. Then came the
cell/smart phones. Their increase consumer wellbeing was similar to vehicles and TV's
but production cost and sales value were relatively minor as was the increase in
GDP, employment and productivity..
How do you measure the GDP of a smart phone. Its a phone, a TV, a tape recorder,
a camera, a movie camera, a library.... Add the cost of said items in 1950's and
60's prices to today's GDP. How much income did it take to buy these items 50
years ago during the glory days of GDP and income growth. Now add the drop in
cost phone call across the country to income. If you take, save and send a picture
little is added to GDP, productivity and income. But there is value. Now adjust for quality. Color TV, Now estimate the
value of all this being portable. The middle class has a lot more income and
wellbeing than is
being measured. Last night I watched Taxes beat Notre Dame on my phone while
first watching a Blue Ray DVD on my movie screen sized TV. Then I switched to
on Amazon TV and finally ended up watching golf on Direct TV. The Boston Braves
moved out when I was 12 and my life came to an end. Since retiring to Florida I
have continued to watch the PATs.
Major scientific accomplishments such as aspirin, penicillin and curing
childhood diseases pile up and contribute to wellbeing not according to GDP. Soon to come gene therapy. How can you measure making a
blind person see? For a comparison of today with past see
Recent Decades Ranked By Problems
GDP includes an estimated quality improvement but to me some items make such
a large improvement that increased GDP must be dramatically understated. The
automobile was the first great consumer good GDP measured and it along its
infrastructure were easy to measure and GDP increased substantial. Employment
also increased dramatically Then came the TV. It also represented a tremendous
increase in wellbeing but over time production techniques dropped dramatically
as did GDP and the employment required per unit of enjoyment. Then came the
cell/smart phones and the enjoyment was as large as vehicles and TV's but cost was minimal and so was the
increase in GDP and employment. Other major scientific accomplishments
as aspirin, penicillin, curing childhood diseases pile up and contribute to
wellbeing but GDP and employment are minimally affected. Soon to
come gene therapy. How can you measure making a blind person see?
If GDP is so much larger why are so many unhappy?
One reason is the yellow journalism created of fear pornography which used to
result from because of major national events. Then technology got
inexpensive, sources of news multiplied and reaching people required little
capital investment meaning reaching a small group could meaningfully increase
Fear pornography for a particular event appeals to a fairly small audience
but this can mean huge profits. No longer is a major world event like the U.S.
1961 blockade of Cuba needed to generate a meaningful and profitable
audience. Today, by naming snowstorms, The Weather Channel has reached a
significantly larger audience who must watch the track of this particular
disaster. As bad as a school shooting is fear affects enough people so CNN ran a
Connecticut tragedy 24 hours a day for four plus days. Years ago a land
falling hurricane was needed to move the ratings. But there are a few who must
watch this media created disaster and CNN, Fox
and others make big bucks.