Question

Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living.
a. The environment becomes dirtier.
b. The crime rate declines.
c. A greater variety of goods become available to consumers.
d. Infant mortality declines.

Answer 1

Answer:

a. Overstate b. Understate c. Understate d. Understate

Explanation:

a. As the environment becomes dirtier, the broad standard of living declines, but it is not included in GDP. GDP includes final goods and services produced. So, here GDP will be overstated.

b. Similarly, the decline in crime rates are not included in GDP, though cause the standard of living to improve. So, here GDP is understated.

c. Availability of variety of goods improves the standard of living but is not included in GDP, so it is understated.

d. A decline in the infant mortality rate means the broad standard of living is improving. But since it is not included in the GDP, it is understated.