price indexes

price indexes - Jones, Macroeconomics, steel nobile ~unted...

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3 steel nobile ~unted :reates ~~ction. rmedi- :venue gener- . ($100 at it is builds lt sup- ie next !O,OOO es not dealer inivan :amine goods a nice : other 2nd an ributes nt Zoe jervice narket :. Over world. calcu- hly the capita In, ask United rent your the rent. in Kevin :Chicago: 2.3 Measuring Changes overTirne 1 27 States from 1900 together with the medical technology of 2000, or the per capita income from 2000 with the medical technology of 1900? Conventional measures of GDP do not incorporate this change in health. To take another example, the specter of the AIDS epidemic in Africa threatens to kill millions of people in the coming decades and has reduced life expectancy significantly in many sub-Saharan countries. The effect of this tragedy on measured GDP, however, will likely be relatively srnalL6 A thirdpotentially significant limitation of GDP is that it doesn't include changes in environmental resources. For example, air and water pollution generated by fac- tories as by-products of their manufacturing do not reduce GDP. Similarly, when nonrenewable natural resources like oil and natural gas are extracted, GDP goes up because of the productive effort spent turning the reserves into products, but there is no deduction from GDP associated with the reduction of oil and natural gas reserves. Interestingly, Martin Weitzman has calculated that the economic value of this depletion may be smaller than one might have expected: the price data used to measure the scarcity of these resources suggest that the overall cost of the finite nature of our nonrenewable resources is less than 1 percent of annual co~isurnption. 1 1 Measuring Changes over Time Measuring GDP in any given year is primarily a matter of careful counting. Mea- suring how GDP changes over time or comparing GDP between two countries is substantially harder. Each process involves separating out changes in prices and quantities. Economists use the word "nominal" to refer to a measure like GDP when prices and quantities have not been separated out, and "real" to refer only to the actual quantity of goods and services. Nominal and real GDP are related by a simple equation: nominal GDP = price level X real GDP (2.2) If an economy produces 37 cell phones and nothing else, and if the price of each is $100, then nominal GDP would equal $3,700, while real GDP would equal 37 cell phones. Nominal GDP can go up either because the price level has gone up or because real GDP has gone up. For example, nominal GDP in 2008 in the United States was $14.4 trillion, and in 1995 only $7.4 trillion. How many more goods and services-that is, how much more real GDP-were produced in 2008 than in 1995? 6~ee, for example, Alwyn Young, "The Gift of the Dying: The Tragedy of AIDS and the Welfare of Future African Generations," Quarterly Journal of Economics, vol. 120 (May 2005), pp. 423-66.
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price indexes - Jones, Macroeconomics, steel nobile ~unted...

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