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Explain the problems that the Office for National Statistics would encounter estimating GDP of the UK economy.

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Introduction

Craig Rothery 13CJ a. Explain the problems that the Office for National Statistics would encounter estimating GDP of the UK economy. There are many problems that can be encountered when estimating GDP of the UK economy. Inaccuracies can arise for a number of reasons. The hidden economy is one such problem. This 'shadow economy' is where taxes are evaded by various methods. The most common is to work and be paid in cash, thus avoiding the need to declare income to the tax authorities and avoiding income tax. There is also a substantial amount of 'welfare cheats' who claim benefits they are not entitled to. It is difficult to estimate the size of the hidden economy, and so the true size of GDP is underestimated. It is estimated that the size of the hidden economy is as large as 7-15% of GDP, meaning that GDP is underestimated by at least 7%. Another problem is home produced services. The work of a housewife or husband is not paid and thus the total output produced in the UK economy is undervalued by a massive amount. ...read more.

Middle

GDP/head is often seen as a key source for comparing the living standards between different countries. Despite being the main indicator of standard of living, it is very inaccurate for comparing living standards. There are so many factors not involved in GDP that affect the quality of living within any country. The most important factors are health and education. Just because the GDP/head for a country is high, it does not show what the health conditions are for the population of that country. To calculate how good health conditions are it requires looking at factors such as the percentage of government spending that goes towards health care, or life expectancy. It would be fairer to use life expectancy as a guide for comparing living standards rather than GDP/head. Education is another very important key to the standard of living. It is best measured by comparing the literacy of the country, or to calculate the percentage of an age group who are attending school. There are also some less important aspects affecting the quality of life. ...read more.

Conclusion

Therefore prices in some countries can be much higher at official exchange rates than in other countries. Therefore, if GDP is to be used to compare living standards between countries it is important to use an exchange rate which compares the cost of living in each country. These exchange rates are known as purchasing power parities. If a good cost 10 francs in France and �1 in Britain, then the exchange rate would be converted to 10 francs = �1, even though the actual market exchange rate is very different. This makes for a fairer comparison of living standards but is still not totally accurate. In some countries consumers have to purchase goods which may be free in other countries. For example, Sweden spends a larger proportion of its national income on fuel for heating because of its colder climate. To compare this country with, say, Italy would be inaccurate for comparing living standards as this extra expenditure does not give them a higher standard of living. There is no way that GDP could be altered to take in to account such problems, so it is always going to be a flawed method of living standard comparisons. ?? ?? ?? ?? ...read more.

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