Question

Which of the following are likely to increase measured GDP, and which are likely to reduce it? a. The fraction of women working outside the home increases. b. There is a sharp increase in the crime rate. c. Higher tax rates cause some people to ask to be paid in cash so they can hide more of the income they earn.

Short answer

a. Likely to increase GDP. b. Likely to increase GDP. c. Likely to reduce GDP.

Step-by-step solution

Factor Check: Increase in Women Working Outside Home

If more women start working outside the home instead of staying in, that will likely increase measured GDP. This is because activities happening within households and don’t pass through the market are not counted as part of GDP. So, when these women begin working in the workforce where their work can be evaluated in monetary terms, it increases GDP. These activities were previously not accounted for.

Factor Check: Increase in Crime Rate

An increase in the crime rate could increase GDP. The GDP includes all goods and services that are purchased to deal with crime, such as security doors, locks, and alarm systems. Additionally, if there is an increase in spending on public safety, police, and legal counsel due to the increase in the crime rate, this spending also contributes to the GDP.

Factor Check: Cash Payments and Tax Evasion

If higher tax rates lead to more payments in cash to evade taxes, this will likely reduce measured GDP. This move under-reports income and might reduce tax revenues, which could lower public spending. The under-reporting of income and business activities would result in a lower total output in official GDP statistics.

Key concepts

Women's labor force participation

When women choose to enter the workforce, it has a direct effect on GDP. Traditionally, work done by women at home, such as caregiving and household management, is not included in GDP calculations since these activities don't involve monetary transactions.
This means their contribution remains invisible in the national economic metrics. However, when women start working in paid positions, their labor is transacted and thereby counted in GDP.

• This transition brings about a noticeable increase in measured GDP as women's paid work is now part of the market economy.
• It also signals greater utilization of the available human resources, leading to potentially more diverse economic growth and empowerment.
• More women in the workforce can spur economic innovation as diverse perspectives are introduced into the labor pool.

This shift not only helps in economic growth but also supports social progress by promoting gender equality and economic independence.

Crime rate impact on economy

An increase in crime can paradoxically lead to a rise in GDP initially, due to increased spending on crime-related activities.
For example, as crime rates increase, there's a resultant demand for security measures such as locks, alarms, and surveillance systems. These are goods and services that contribute to GDP.
Furthermore, public expenditure on law enforcement, legal processes, and correctional services can add to GDP figures, as these are considered part of government spending.
This may seem like an economic boost, but the scenario has deeper implications:

• Money is diverted from potentially more productive uses that could lead to sustainable growth.
• Long-term economic stability could be undermined as confidence in economic conditions may wane.
• The social cost of crime impacts the quality of life, potentially deterring investment and impacting job creation negatively.

While GDP might display growth, the associated increase in crime signifies issues that need addressing beyond simple economic metrics.

Tax evasion and GDP

Tax evasion poses a hidden challenge to the accuracy and reliability of GDP measurements. When individuals or businesses opt for cash payments to avoid taxes, a portion of their income becomes unreported.
This underreporting skews GDP figures, as the official output may appear lower than it actually is.

• This results in decreased tax revenues which in turn could reduce government spending on public services and infrastructure.
• The lack of complete income reporting reduces the apparent scale of economic activity, leading to misinformed policy decisions.
• Chronic tax evasion can contribute to a cycle of economic inefficiencies and can limit funds available for social support programs or educational infrastructure, slowing national development.

Addressing tax evasion is crucial for maintaining accurate economic measurements and ensuring a fair playing field for taxpayers, which overall supports a healthier economy.