Question

1a) Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. Determine the GDP in two ways; the value-added method, by computing value added at each stage of production, and the final sales value method.







1b) Why might the GDP be a poor measure of production in an economy? Fully detail 3 reasons.







1c) Why might the CPI index be a preferred measure of price movements compared to the GDP deflator?







1d) Why might the PCE index be a preferred measure of price movements compared to the CPI index?

Answer 1

1) Vaue added method:

Value of all goods sold = cotton + cloth + prom dresses + dresses = $100 + $300 + $700 + $1200 = 2300

Intermediated goods = cotton + cloth + prom dresses = $100 + $300 + $700 = $1100

GDP = Value of all goods sold - Intermediated goods = $2300 - $1100 = $1200

Final sales value method:

Final sales are for $1200

Thus GDP = $1200

2) The main issues of the GDP as the indicator of society’s economy and society’s well-being focusing on economy as well as environment are as follows:

--GDP does not account for leisure time.

--GDP includes what is spent on environmental protection however it does not include actual levels of environmental cleanliness. GDP is inclusive of the cost of buying pollution-control equipment, however it does not address whether the water and air are actually dirtier or cleaner.

--GDP consists of what is spent on healthcare, and education, however does not include health, and learning. GDP counts spending on medical care, however does not address whether infant mortality or life expectancy have fallen or risen. Similarly, GDP includes the spending on education, however fails to address directly how much of the population can write, read, or do basic mathematics

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