When things are traded in a market, or embedded in govemment tax statistics, they are relatively casy to measure. Many of our measurement difficulties arise precisely because some of the most valuable things are not casily measurable. Gross Domestic Product (GDP) casily captures the output of washing machines, but not of happiness, hcalth or environmental depreciation. Since we do not buy and sell clean air or moderate temperatures in a marketplace, governments are not automatically collecting statistics for use in national acoounts data. People who visit France quickly leam that the French have a good quality of life, better than you would expect simply by kooking at their GDP. They cnjoy a nice climate, long lunches, access to Mediterrancan beaches and litle congestion since they have plenty of land in relation to their population. They also retire at a relatively young age and, having long life expectancy, spend plenty of happy years in retirement. Their GDP statistics are measuring production of Renault and Peugeot, and of luxuries from Louis Vuitton and Hemès, but omit plentiful leisure, lack of stress and little congestion. Similarly, the output of the police, civil service and teachers in schools is not charged for in the market and hence not automatically valued by the market. How do we measure the output of the police?. Typically, national income statisticians measure the inputs (the age bill of police forces, rent of police stations, the cost of using police cars and police computers). This is a large step in the right direction, but it is far from perfect. If society 2 CONFIDENTIAL CONFIDENTIAL BPAI2403 becomes more unlawful, we cnd up choosing to have more police to counter crime. So, GDP rises because we are spending moare an the police force. But in reality, people are feeling less happy with the greater prevalence of crime and resent having to 'waste' more resources on additional policing in order lo counter the crime wave. Conversely, when we cut back the size of the amy, GDP falls since less is being spent on the military, but we are actually receiving less justification as a consequence. Think of all as a health warning on GNP and GDP statistics. They measure what they should be to measure. Unless and until electorates want to spend a lot more money collecting more comprchensive statistics, GNP and GDP will use data already being collected annaally for other purposes such as taxation. Explain why some final goods and services are not included in GDP. Explain the reason that the value of intermediate goods produced and sold during the year is not included directly as a part of GDP, but the value of intermediate goods produced and not sold is included directly as a part of GDP. (b)