Passage
The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.
For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more – even if inefficiently – output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the United Kingdom, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one.
Likewise, quality improvements – say, better cars rather than just more cars – account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality.
The same problems in making comparisons over time apply to comparisons across countries. The United States spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes. Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things.
Another marked change in most societies is an increase in inequality. This means that there is increasing disparity between average (mean) income and the median income (that of the “typical” person, whose income lies in the middle of the distribution of all incomes). If a few bankers get much richer, average income can go up, even as most individuals’ incomes are declining. So GDP per capita statistics may not reflect what is happening to most citizens.
We use market prices to value goods and services. But now, even those with the most faith in markets question reliance on market prices, as they argue against mark-to-market valuations. The pre-crisis profits of banks – one-third of all corporate profits – appear to have been a mirage.
This realization casts a new light not only on our measures of performance, but also on the inferences we make. Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt USstyle capitalism. Of course, anyone who wanted to could have seen American households’ growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic.
Recent methodological advances have enabled us to assess better what contributes to citizens’ sense of well-being, and to gather the data needed to make such assessments on a regular basis. These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness.
Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment.
Statistical frameworks are intended to summarize what is going on in our complex society in a few easily interpretable numbers. It should have been obvious that one couldn’t reduce everything to a single number, GDP. The report by the Commission on the Measurement of Economic Performance and Social Progress will, one hopes, lead to a better understanding of the uses, and abuses, of that statistic.
The report should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability; and it should provide impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society. Such reforms will help us direct our efforts (and resources) in ways that lead to improvement in both.
Question for 100 RCs for Practice Questions- 51
Try yourself:The function of paragraph 3 in the passage as a whole is to:
Explanation
Option 1 is incorrect. 3rd paragraph does not narrow down the scope of the passage. Option 2 is correct. Paragraph 1 states that GDP has limitations and there is an opportunity to improve the economic metrics. Paragraphs 2 and 3 provide examples corresponding to the assertion made in paragraph 1. Option 3 is incorrect. Para 3 makes no mention of the most prominent limitation of GDP. Option 4 is incorrect. In context of the passage as a whole, paragraph 3 serves to provide examples of limitations of GDP. The function of paragraph 3 is not to explain the need for quality improvement per se.
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Question for 100 RCs for Practice Questions- 51
Try yourself:The passage mentions all of the following as not included in GDP, EXCEPT:
Explanation
Option 1 is incorrect. The passage states that recent methodological advances demonstrate importance of social connectedness. It is implied that GDP did not factor in social connectedness. Therefore this is not an exception. Option 2 is incorrect. The passage states that “Any good measure … must also take account of sustainability. … our national accounts need to reflect the depletion of natural resources and the degradation of our environment.” Option 3 is correct. The passage does not mention whether or not a country’s growing indebtedness is a parameter of GDP. Option 4 is incorrect. Similar to option 2 the need for GDP to take account of depletion of natural resources is mentioned by the author.
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Question for 100 RCs for Practice Questions- 51
Try yourself:The author of the passage would most likely agree with which of the following?
Explanation
Option 1 is correct. The author states that “The fact that GDP may be a poor measure of well-being … has long been recognized.” Also, it states that “… in most societies [there] is an increase in inequality … GDP per capita statistics may not reflect what is happening to most citizens.” This implies that GDP might not capture the growing inequality.” In the 8th paragraph the writer says that “Recent methodological advances have enabled us to assess better what contributes to citizens’ sense of wellbeing, and to gather the data needed to make such assessments on a regular basis” GDP, by being a false metric in itself may hinder the application of these methodological advances. Option 2 is incorrect. In fact, the author states the opposite that GDP is a poor measure of a nation’s wellbeing. Option 3 is incorrect. The passage does not mention of intrinsic value of goods and services. Option 4 is incorrect. The passage makes no mention of capitalist vs. non-capitalist countries.
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Question for 100 RCs for Practice Questions- 51
Try yourself:The primary purpose of the passage is to:
Explanation
Option 1 is correct. The passage lists the shortcomings of the GDP and how ‘one couldn’t reduce everything to a single number GDP.’ The last paragraph then states that “the report of the Commission on the Measurement of Economic Performance and Social Progress should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability; and it should provide impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society. Such reforms will help us direct our efforts (and resources) in ways that lead to improvement in both. ” Option 2 is incorrect. This point is made in the passage to show the consequences of incorrect inferences made from GDP numbers. It is not the main point of the passage. Option 3 is incorrect. The passage does not suggest ways to improve inferences from GDP numbers; it merely states that inferences from GDP numbers must be improved. Option 4 is incorrect. The passage mentions this point to argue against chasing GDP growth. It is not the primary purpose of the passage.
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Question for 100 RCs for Practice Questions- 51
Try yourself:The reference to “American households’ growing indebtedness” serves to do which of the following?
Explanation
Option 1 is incorrect. The author states that “…many Europeans argued that Europe should adopt USstyle capitalism.” The author does not argue for or against it. Option 2 is correct. In paragraph 7, the author states that “before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism. Of course, anyone who wanted to could have seen American households’ growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic.” Hence, the author highlights that limitations of GDP could have been observed by looking at American households’ growing debts.” Option 3 is incorrect. The passage mentions that pre-crisis growth of US only “seemed” to be stronger than that of Europe. Rather the author argues that the perceived growth was actually a false impression given by GDP statistics. Option 4 is incorrect. The author does not mention “American households’ growing indebtedness” to show the importance of recent methodological advances.
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