What Main Measures Of Economic Activity Fail Include CPI and GDP Essay

What Main Measures Of Economic Activity Fail Include CPI and GDP - Essay Example The nation's central measure of well-being works like a calculating machine that adds but cannot subtract. It treats everything that happens in the market as a gain for humanity, while ignoring everything that happens outside the realm of monetized exchange, regardless of the importance to well-being (Cobb, 1995). But GNP/GDP measures have some flaws in fully estimating economic development; the most common flaws are listed below: One should not neglect the way GDP ignores the contribution of the social realm--that is, thus the economic roles of household is not taken into account. This is where much of the nation's most important work gets done. Why this happens can be explained by the fact that money do not change hands. The GDP doesn't count it at all--which means that the more our families and communities decline and a monetized service sector takes their place, the more the GDP goes up. The GDP totally disregard the distribution of income, for example, so that enormous gains at the top appear as new prize for all. It makes no distinction between the person in the secure high-tech job and the "downsized" white-collar worker who has to work two jobs at lower pay. CPI CPI is used as an economic indicator to measure inflation. The CPI is an indicator of the effectiveness of government policy, besides it is used by business executives, labor leaders and other private citizens use the index as a guide in making economic decisions. The Columbia Encyclopedia defines The Consumer Price Index (CPI), as a measurement of the cost of living prepared by the U.S. Bureau of Labor Statistics, tracks changes in retail prices of an average "market basket." Changes are compared to prices in a previously selected base year, from which figures the percentage increase or decrease in the cost of living can be calculated. In addition to changes over time, such analyses must also consider regional variations in the cost of living, and the relative weighting of the components of the index must be reappraised periodically. Despite its enhancements over the years, the CPI still has considerable problems as an inflation measure. For instance, the index overstates many individual price increases by failing to fully adjust posted price changes for quality improvements and by underestimating the growth of sales by discount retailers (Bureau of Labor Statistics, 1997). Economists take into consideration the CPI when taking time-series measurements of financial instruments, since such measurements can only sense if they are expressed in "constant" money terms. One should bear in mind that the CPI is not an economic variable, as it is statistic measure of inflation. To calculate the monthly CPI, the US Department of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a "mythical" household budget. For example, the