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Homework answers / question archive / 1)The 'Corporate Taxation' model Imposes tax on the income of the business entity at entity level Permits the Tax Commissioner to tax both the company and the shareholder for income distributed to the shareholder Is designed to ensure that shareholders to whom the company pays dividends pay all the tax owing for the dividend income Is designed to ensure that companies and shareholders always share in equal proportion the tax owing for company income 2)Limitations of Real GDP Real GDP measures the value of goods and services that are bought in markets
1)The 'Corporate Taxation' model
Imposes tax on the income of the business entity at entity level
Permits the Tax Commissioner to tax both the company and the shareholder for income distributed to the shareholder
Is designed to ensure that shareholders to whom the company pays dividends pay all the tax owing for the dividend income
Is designed to ensure that companies and shareholders always share in equal proportion the tax owing for company income
2)Limitations of Real GDP Real GDP measures the value of goods and services that are bought in markets. Some of the factors that influence the standard of living and that are not part of GDP are ? Household production ? Underground economic activity ? Health and life expectancy ? Leisure time ? Security ? Environmental quality ? Political freedom and social justice Household Production An enormous amount of production takes place every day in our homes. Preparing meals, cleaning the kitchen, changing a light bulb, cutting grass, washing a car, and caring for a child are all examples of household production. Because these productive activities are not traded in markets, they are not included in GDP. The omission of household production from GDP means that GDP underestimates total production. But it also means that the growth rate of GDP overestimates the growth rate of total production. The reason is that some of the growth rate of market production (included in GDP) is a replacement for home production. So part of the increase in GDP arises from a decrease in home production. Two trends point in this direction. One is the number of women who have jobs, which increased from 38 percent in 1976 to 58 percent in Canada in 2010. The other is the trend in the market purchase of traditionally home-produced goods and services. Whose production is more valuable: the chef’s whose work gets counted in GDP ... For example, more and more families now eat in restaurants—one of the fastest-growing industries in Canada—and use day-care services. This trend means that an increasing proportion of food preparation and child care that were part of household production are now measured as part of GDP. So real GDP grows more rapidly than does real GDP plus home production. Underground Economic Activity The underground economy is the part of the economy that is purposely hidden from the view of the government to avoid taxes and regulations or because the goods and services being produced are illegal. Because underground economic activity is unreported, it is omitted from GDP. The underground economy is easy to describe, even if it is hard to measure. It includes the production and distribution of illegal drugs, production that uses illegal labour that is paid less than the minimum wage, and jobs done for cash to avoid paying income taxes. This last category might be quite large and includes tips earned by cab drivers, hairdressers, and hotel and restaurant workers. Estimates of the scale of the underground economy in Canada range between 5 and 15 percent of GDP ($85 billion to $255 billion). ... or the busy mother’s whose dinner preparation and child minding don’t get counted? Provided that the underground economy is a stable proportion of the total economy, the growth rate of real GDP still gives a useful estimate of changes in economic well-being and the standard of living. But sometimes production shifts from the underground economy to the rest of the economy, and sometimes it shifts the other way. The underground economy expands relative to the rest of the economy if taxes become especially high or if regulations become especially restrictive. And the underground economy shrinks relative to the rest of the economy if the burdens of taxes and regulations are eased. During the 1980s, when tax rates were cut, there was an increase in the reporting of previously hidden income and tax revenues increased. So some part (but probably a very small part) of the expansion of real GDP during the 1980s represented a shift from the underground economy rather than an increase in production. Health and Life Expectancy Good health and a long life—the hopes of everyone—do not show up in real GDP, at least not directly. A higher real GDP enables us to spend more on medical research, health care, a good diet, and exercise equipment. And as real GDP has increased, our life expectancy has lengthened—from 70 years at the end of World War II to approaching 80 years today. But we face new health and life expectancy problems every year. AIDS and drug abuse are taking young lives at a rate that causes serious concern. When we take these negative influences into account, we see that real GDP growth overstates the improvements in the standard of living. Leisure Time Leisure time is an economic good that adds to our economic well-being and the standard of living. Other things remaining the same, the more leisure we have, the better off we are. Our working time is valued as part of GDP, but our leisure time is not. Yet that leisure time must be at least as valuable to us as the wage that we earn for the last hour worked. If it were not, we would work instead of taking leisure. Over the years, leisure time has steadily increased. The workweek has become shorter, more people take early retirement, and the number of vacation days has increased. These improvements in economic well-being are not reflected in real GDP. Security Security has several dimensions that influence our economic well-being. We value the security that comes from our jobs, the security provided by local police services, and the security that comes from our national defence. Environmental Quality Economic activity directly influences the quality of the environment. The burning of hydrocarbon fuels is the most visible activity that damages our environment, but it is not the only example. The depletion of nonrenewable natural resources, the mass clearing of forests, and the pollution of lakes and rivers are other major environmental consequences of industrial production. Resources that are used to protect the environment are valued as part of GDP. For example, the value of catalytic converters that help to protect the atmosphere from automobile emissions is part of GDP. But if we did not use such pieces of equipment and instead polluted the atmosphere, we would not count the deteriorating air that we were breathing as a negative part of GDP. An industrial society possibly produces more atmospheric pollution than an agricultural society does. But pollution does not always increase as we become wealthier. Wealthy people value a clean environment and are willing to pay for one. Compare the pollution in China today with pollution in the Canada. China, a poor country, pollutes its rivers, lakes, and atmosphere in a way that is unimaginable in Canada. Political Freedom and Social Justice Most people in the Western world value political freedoms such as those provided by the Canadian Constitution. And they value social justice—equality of opportunity and of access to social security safety nets that protect people from the extremes of misfortune. A country might have a very large real GDP per person but have limited political freedom and social justice. For example, a small elite might enjoy political liberty and extreme wealth while the vast majority are effectively enslaved and live in abject poverty. Such an economy would generally be regarded as having a lower standard of living than one that had the same amount of real GDP but in which political freedoms were enjoyed by everyone. Today, China has rapid real GDP growth but limited political freedoms, while Poland and Ukraine have moderate real GDP growth but democratic political systems. Economists have no easy way to determine which of these countries is better off. The Bottom Line Do we get the wrong message about the level and growth in economic well-being and the standard of living by looking only at the level and growth of real GDP? We do get the wrong message. One of the largest reasons is that developing countries have a larger amount of household production and a larger underground economy than do developed countries, so the gaps between the standards of living are exaggerated. Also as real GDP grows, part of the measured growth reflects a switch from home production to market production and from underground economic activity to regular production. So the growth rate of real GDP overstates the growth rate in the standard of living. Economics in Action A Broader Indicator of Economic Well-Being The limitations of real GDP reviewed in this chapter affect the standard of living and general well-being of every country. So to make international comparisons of the general state of economic well-being, we must look at real GDP and other indicators. The United Nations has constructed a broader measure called the Human Development Index (HDI), which combines real GDP, life expectancy and health, and education. Real GDP per person (measured on the PPP basis) is a major component of the HDI. The dots in the figure show the relationship between real GDP per person and the HDI. In 2010, Norway had the highest real GDP per person, but the second highest HDI. (Australia was highest.) Australia and Norway, along with the United States, have higher HDIs than Canada. The HDI of Canada is lower than that of these three other countries for a combination of reasons, one of which is a lower GDP per person. African nations have the lowest levels of economic well-being. Zimbabwe has both the lowest real GDP per person and the lowest HDI. The Human Development Index Source of data: United Nations hdr.undp.org/en/statistics/data. It is possible to construct broader measures that combine the many influences that contribute to the standard of living. The United Nations’ Human Development Index (HDI) described in Economics in Action above is one example of a broader measure of economic well-being and the standard of living, but this measure places a good deal of weight on real GDP. Dozens of other measures have been proposed. One includes resource depletion and emissions in a Green GDP measure. Another emphasizes the enjoyment of life rather than the production of goods in a “genuine progress index” or GPI. Despite all the alternatives, real GDP per person remains the most widely used indicator of economic well-being and the standard of living.
Real GDP has many limitations. Select one of the limitations listed on Page 477 of your textbook that resonates with you. In at least two paragraphs discuss the following:
a) Why do you agree that this is a limitation?
b) Can this limitation be overcome in any way?
c) How difficult would it be to overcome this limitation and measure this activity in a meaningful way such that it can be included in a nation’s GDP?
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