Question

Measuring the Aggregate Economy

The following questions addressa couple of issues regarding the problems associated with measuring the value of the contribution of government to GDP.

a. When statisticians calculate GDP, they have traditionally used different methods for valuing goods and services provided by the private and government sectors. Explain the reason for the difference.

b. “Fairly recently statisticians have started to measure some bits of public-sector output directly by, for instance, counting the number of operations performed by health services or the number of students taught in schools”.[1]Thisrepresents a change in the way economists have measured the contribution of government to GDP.  Why is this an improvement over the traditional method of measuring the contribution of government to GDP?

Answer 1

A. The prime reason behind using different methods for valuing goods and services provided by the private and government sectors in GDP is that it helps in clearly identifying the contribution made by each sector in the GDP. Thus it helps in efficient policy formation. Identifying the contribution of each sector seperately in the GDP helps the government in allocating funds in each sector and investing in the desired sector. The sector with low productivity and low contribution to the GDP may be identified and certain corrective measures and policies aiming towards increasing their productivity may be taken.

B. This method of directly measuring the public-sector output is an improvement over the traditional method of measuring the contribution of government to GDP because it helps in accurate measurement and chances of data loss or data misinterpretation can be minimised.