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ECON 1P92 01/17/13  CPI and GDP Deflator move together o Same inflationary forces affect both of them  CPI track consumer prices  GDP deflator tracks prices of all g & s produced in Canada Differences:  E.g. world price of coffee rises, pushes up CPI  E.g. Canada produces no coffee, so no effect on Canadian GDP deflator Limitation: Omissions from GDP  GDP does not measure economic activity outside of regular and legal market o Illegal activities (drugs, prostitution, etc.) o The underground economy (tax-avoided transactions) o Home production (housework, DIY projects) o Economic ‘bads’ (pollution)  Are salaries of police a good thing? Or are they just an offset to the bad (criminals)  GDP does not measure all aspects of human welfare Living Standards: Output and Productivity  Real GDP increased over the past century – 2 main causes 1. An increase in inputs – land, labor, and capital used in production 2. An increase in the amount of output produced per unit of output  Per capita output is output per person (GDP/population) – measures the average output or income per person  Per capita output is a good measure of changes in average standard of living  Income is an important part of well-being o GDP is a very good measure of income o Change in GDP is a good measure of changes in economic well-being. (As long as unmeasured economic activity changes little) Labor Productivity = GDP / total # of hours worked  Changes in productivity better measure of changes in overall living standards than changes in GDP per capita  This only part of overall well-being  Other factors may contribute to quality of life: health, security, environment, etc. Internal value of C$  The purchasing power of the dollar in Canada External value of C$  The foreign currency price of the Canadian dollar  The opposite of the exchange rate ECON 1P92 01/17/13 Chapter 21
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