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Chapter 19: Problem 4

Which of the following are likely to increase measured GDP, and which are likely to reduce it? a. The fraction of women working outside the home increases. b. There is a sharp increase in the crime rate. c. Higher tax rates cause some people to ask to be paid in cash so they can hide more of the income they earn.

Short Answer

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a. Likely to increase GDP. b. Likely to increase GDP. c. Likely to reduce GDP.

Step by step solution

01

Factor Check: Increase in Women Working Outside Home

If more women start working outside the home instead of staying in, that will likely increase measured GDP. This is because activities happening within households and don’t pass through the market are not counted as part of GDP. So, when these women begin working in the workforce where their work can be evaluated in monetary terms, it increases GDP. These activities were previously not accounted for.
02

Factor Check: Increase in Crime Rate

An increase in the crime rate could increase GDP. The GDP includes all goods and services that are purchased to deal with crime, such as security doors, locks, and alarm systems. Additionally, if there is an increase in spending on public safety, police, and legal counsel due to the increase in the crime rate, this spending also contributes to the GDP.
03

Factor Check: Cash Payments and Tax Evasion

If higher tax rates lead to more payments in cash to evade taxes, this will likely reduce measured GDP. This move under-reports income and might reduce tax revenues, which could lower public spending. The under-reporting of income and business activities would result in a lower total output in official GDP statistics.

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Most popular questions from this chapter

What is the difference between GDP and GNP? Briefly explain whether the difference is important for the United States.

Describe the four major components of expenditures in GDP and write the equation that represents the relationship between GDP and the four expenditure components.

Ireland is one of the few countries where GDP and GNP differ significantly. Using GDP per person, Ireland has the third-highest income per person in Europe. An article on the Financial Times website stated, "With GDP being about 20 percent larger than GNP, Irish people appear (when using GDP per person) to be richer than what they feel they are." Briefly explain the author's reasoning.

According to research by Rafael La Porta of Tuck School of Business at Dartmouth and Andrei Shleifer of Harvard University, in developing countries, the average firm in the informal sector, or underground economy, employs 4 workers as opposed to 126 workers employed by the average firm in the formal sector. a. What is the informal sector, or underground economy? b. Why would we expect firms in the informal sector to be so much smaller than firms in the formal sector?

A student remarks: "It doesn't make sense that intermediate goods are not counted in GDP. A computer chip is an intermediate good, and without it, a laptop won't work. So, why don't we count the computer chip in GDP?" Provide an answer to the student's question.
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