Part of gross domestic product consists of production in the so-called FIRE sector (finance, insurance, real estate,
Question:
Part of gross domestic product consists of production in the so-called FIRE sector (finance, insurance, real estate, and rental and leasing). Value-added is notoriously difficult to measure in this sector, as it is hard to determine exactly what the inputs and outputs are. For example, banks are included in the FIRE sector, and we know that they contribute to our well-being by making borrowing and lending more efficient and by providing transactions services. However, as most of the inputs and outputs associated with a bank are not actual physical quantities, it is much more difficult to measure value-added in banking than in, say, the production of apples. During the global financial crisis, people began to question some types of financial activity and their value to society; in particular, they observed some financial firms and individuals earning large incomes and argued that these firms and individuals actually provide little or no financial services. Discuss the implications that questionable financial activity has for the measurement of GDP.
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