In the following examples, determine in which direction, if any, measured GDP will incorrectly estimate the living standards of that country.

Question

(a) (Overstate, Understate, Neither) In India, a greater portion of workers produce nonmarket output. 

(b) (Overstate, Understate, Neither) In China, the air pollution is much greater. 

(c) (Overstate, Understate, Neither) In Greece, many transactions occur in the underground economy -- more than in the United States, for example. 

(d) (Overstate, Understate, Neither) In France, the average work week is shorter than that in the U.S. 

Answer 1

a. understate: if the workers produce a lot of nonmarket output, GDP would be understated because nonmarket output should be included in GDP but generally is not because it not sold in a recorded transaction. this goods, however, still raise the living standards

b. overstate: China uses high polluting factories and industries to raise GDP but the production of pollution actually lowers the living standards of the people.

c. understate: underground transactions are not included in GDP but they still raise the living standards of the people

d. Niether: The fact that the french have a shorter workweek does decrease their GDP, but it also decreases their living standard. This is a choice the French have made, a trade off that does not distort GDP or living standards.