When things are traded in a market, or embedded in government tax statistics, they are relatively easy to measure. Many of our measurement difficulties arise precisely because some of the most valuable things are not easily measurable. Gross Domestic Product (GDP) easily captures the output of washing machines, but not of happiness, health 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 accounts data.

People who visit France quickly learn that the French have a good quality of life, better than you would expect simply by looking at their GDP. They enjoy a nice climate, long lunches, access to Mediterranean beaches and little 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 Herms, 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 becomes more unlawful, we end up choosing to have more police to counter crime. So, GDP rises because we are spending more on 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 to counter the crime wave.

Conversely, when we cut back the size of the army, GDP falls since less is being spent on the military, but we are actually receiving less justification as a consequence. Think of all this 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 comprehensive statistics, GNP and GDP will use data already being collected annually for other purposes such as taxation.

(a) Explain why some final goods and services are not included in GDP. (4 marks)

(b) 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. (8 marks)

(c) Between 2018 and 2021, GDP measured in current prices fell from RM96 billion to RM48 billion. Over the same period, the relevant price index fell from 100 to 75.

Calculate:

(i) The percentage decline in nominal GDP from 2019 to 2021. (3 marks)

(ii) The percentage decline in real GDP from 2019 to 2021. (5 marks)

(d) During the pandemic, the Malaysian real GDP is substantially lower than it was predicted prior to pandemic era. Prior to the pandemic, the economy is expected to grow at 5.5% per annum. However, due to the covid-19 disaster, the Malaysian economy now is expected to grow at 4.1%. A significant 1.4% lower than previously expected. Explain the above statement in terms of the Malaysian citizens well-being. (10 marks)