By Warren Palmer, Beloit College Who says you cannot add apples and oranges? Eco

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By Warren Palmer, Beloit College

Who says you cannot add apples and oranges? Economists do all the time. Prices allow economists to add apples and oranges and haircuts and every other product in the economy. The result is gross domestic product (GDP), a single number that sums up the annual final market production of goods and services in an entire economy. Measuring GDP and changes in GDP make it possible to estimate an economy's growth and to compare output between different economies over time. But such comparisons must be interpreted carefully.

As this article discusses, GDP per person is one third higher in the U.S. than in Europe, but this does not mean that Americans necessarily have a higher standard of living than Europeans do. GDP is an imperfect measure of an economy's output and an even weaker measure of well-being. GDP excludes non-market production of goods and services, such as the value added in home-cooked meals. GDP also excludes factors that can contribute to well-being, such as personal security, leisure time, clean air, or natural beauty. Moreover, while GDP measures output, it reveals little about how that output contributes to well-being. Consider that both cigarettes and treatment of smokers for lung diseases count as part of GDP. Or consider that it costs more for home heating to achieve the same level of comfort in a cold climate as a mild climate. The extra heating costs increase GDP but not well-being.

Professor Robert Gordon of Northwestern argues that when properly measured, the living standards in the U.S. and Europe may be roughly equal. The solution to the mismeasurement of well-being is not to discard GDP as a useful statistic but to recognize its limitations.

Explanation / Answer

1)69% 2)GDP per person 3)slower,lower 4) Europe has higher unemployment, shorter work weeks, and longer vacations 5) Europeans spend less on transportation because of denser housing and better public transportation.

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