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AP Macroeconomics AMSCO Guided Notes

2.2: The Limitations of GDP

AP Macroeconomics
AMSCO Guided Notes
2.1 The Circular Flow and GDP
2.2 The Limitations of GDP
2.3 Unemployment
2.4 Price Indices and Inflation
2.5 Cost of Inflation
2.6 Real vs. Nominal GDP
2.7 Business Cycles

AP Macroeconomics Guided Notes

AMSCO 2.2 - The Limitations of GDP

Essential Questions

  1. What are some limits of GDP as a measure of economic performance?
I. Exclusion of Intermediate Transactions

1. What is the difference between intermediate goods and final goods, and why does GDP exclude intermediate transactions?

2. What types of financial transactions does GDP exclude and why?

II. Exclusion of Non-Recorded Transactions

A. Nonmarket Transactions

1. What are nonmarket transactions and why are they excluded from GDP calculations?

2. How does the treatment of domestic activities differ between unpaid work and paid work in GDP measurements?

B. Unreported Activities

1. What are unreported activities and how do they affect GDP calculations?

C. Illegal Activities

1. Why are illegal activities excluded from GDP even though they represent economic transactions?

III. GDP as a Measure of Economic Well-Being

1. What was the original purpose of GDP and how has its use changed over time?

2. Why have economists developed alternatives to GDP for measuring economic health?

A. Alternative Measures: The Genuine Progress Indicator

1. What is the Genuine Progress Indicator and how does it differ from GDP in measuring economic progress?

B. Alternative Measures: The Human Development Index

1. What are the three dimensions of the Human Development Index and why was it created?

2. How does Gross National Income differ from GDP and why is this distinction important for developing nations?

C. Income Inequality

1. How does income inequality affect the relationship between GDP growth and individual economic well-being?

2. What does the Congressional Budget Office data reveal about income distribution between 1979 and 2016?

D. Negative Outputs

1. What are negative outputs and why should they be considered when measuring economic impact?

2. How does the lithium mining example illustrate the limitations of GDP in accounting for environmental costs?

E. Quality of Life

1. What factors contribute to quality of life but are not included in GDP measurements?

2. According to Senator Kennedy's speech, what does GDP count that may not reflect true economic well-being?

Key Terms

economic well-being

intermediate goods

final good

nonmarket transactions

underground economy