Reference no: EM133307623

Case: Capturing Progress in a Single Number

In the United States, the Bureau of Economic Analysis (BEA) estimates GDP using the National Income and Product Accounts (NIPAs). GDP is used to inform policy judgments reliant on output, employment, and price change. GDP is also used to measure economic well-being or "utility."

As a measure of production, however, economists generally agree that GDP is a sufficient measurement tool, although it remains problematic in some areas. For instance, until 2019, economists had limited ability to value digital goods and services appropriately because NIPA did not accommodate digital goods and services well, given the rapid expansion of the digital economy.

The two most significant GDP measurement tools arising from NIPA include the Income and Expenditure Approaches to GDP measurement. Economists use these measurement tools to understand the level and growth of gross domestic product (GDP), and GDP per capita. GDP per capita (the value of GDP divided by the population) represents the value of goods and services theoretically available for each member of the population. When GDP grows, a population is assumed to be better off, because each person theoretically enjoys more goods and services.

NIPA was designed to measure production when manufacturing output constituted a large proportion of economic activity in the United States. NIPA was designed before services made up a significant portion of economic activity and prior to the advent of digital goods and services. GDP measurement using NIPA does not capture changes in the quality of goods and services or other benefits not captured in price. For instance, a face-to-face speech therapy session may be valued higher than a less expensive online session, using standard national income accounting measures.

Economic benefits not reflected in price diminish the value attached to each unit of output. In other words, increases in utility connected with undervalued products might be represented inaccurately using price to measure the value of output. For instance, a land line (meaning a telephone attached to a fixed location) and a cellular phone are qualitatively different. Individuals cannot access a land line if they are having car trouble or a medical emergency many miles from help, but they can easily access these services using a cellular telephone. Dollar for dollar, output times price might be an insufficient measure of well-being in this and many other cases.

History has demonstrated that cyclical or other periods of economic decline can be problematic if they are not addressed through policies designed to safeguard and improve an economy's health. These policies address unemployment and price levels and may be affected by errors in GDP measurement using NIPA. Economists generally believe that GNP measures are a useful measure of how well or poorly an economy is performing, including phases of the business cycle and assessment of output gaps associated with unemployment or inflation.

Your Role:

Assume that you are a project manager launching an "iPads for Seniors" program set up by your state. Used by seniors, iPads can boost memory, mobility, and social skills that deteriorate with age (Pacheco, 2011). Your state will purchase the iPads and distribute them to seniors residing in nursing homes. These devices will also be distributed to low-income seniors receiving at-home care. Most of these individuals (and often their care-givers) are unfamiliar with digital tools. Following a virtual tour of the Metropolitan Museum of Art with your grandmother, you are excited to educate individuals, families, care-givers, and care centers regarding digital tools over the internet. Seniors will use iPads to manage financial needs and train their brains with different games, thus increasing their well-being.

Your state legislature has tasked you as project manager with briefing a legislative committee on program benefits. You believe it is important for legislators to understand how the value of program benefits exceed the value of program costs measured as the number of iPads sold in your state and the value of wages paid to individuals employed to implement this program, consistent with standard GDP accounting procedures.

Using Income or Expenditure Approaches to GDP measurement, you will explain that direct program benefits may appear to be lower than actual utility or well-being delivered by the program, given unvalued rises in well-being supported by access to digital devices or content.

Question 1: Why standard approaches to GDP measurement may not accurately reflect utility or benefits of many activities to individuals.
Additional limitations of using GDP as a measure of economic welfare.

Question 2: One example of a good you use today that could be undervalued in GDP estimates, given significant increases in quality. (Example: A telephone allows an individual to access emergency help. Telephones used to be physically attached to physical structures; currently, satellite phones allow soldiers to direct aid to remote areas, motorists to access roadside assistance, and elderly individuals to travel with what might be a life-saving device.)