Tuesday, August 11, 2009

Does Inaccurate Measurement Of GDP Lead To Misstatements About The Economy And Misleading Research?

A comment I posted on William J. Polley Blog, "GDP...not a good measure of national welfare (but still very useful)."
Within the economic arena, as opposed to general welfare, does an incomplete and possibly inaccurate measurement of GDP lead to misstatements about the economy and misleading research? For example, at beginnings of unemployment increases are there greater proportions of workers who take on non-measured home based jobs like caring full-time for an invalid parent, doing major home repairs, etc. A reconstructed unemployment might be lower than measured, GDP might be higher at early stages of recessions, and it might explain some of the inability of the market to reduce measured unemployment.

If there are problems measuring GDP, then do we know how GDP responds? For example, in Cash for Clunkers, the new car purchases are added to GDP, but the destruction of the older vehicles is not subtracted. If instead we had a trade in program for new energy efficient homes that required destroying the older, less energy efficient home, we would reach a different result about GDP effects. The new home purchase would add to GDP as for cars, but the destruction of the old home would result in a reduction of GDP because imputed rent on homes is included in GDP unlike cars.

We would get different economic multiplier effects, etc. about two very similar programs and draw misleading conclusions unless we recognized the data inconsistency. Given what we know about the problems with GDP and recognizing that there are also hidden problems, do we know how economic research and measurements are biased by the GDP inaccuracies? Have we adopted mistaken policies due to inaccurate data?
Read the entire blog post including comments here.

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