Page 143 - Krugmans Economics for AP Text Book_Neat

section 3

Module 10: The Circular Flow and Gross
Domestic Product
Module 11: Interpreting Real Gross Domestic Measurement
Product
Module 12: The Meaning and Calculation of
Unemployment
Module 13: The Causes and Categories of of Economic
Unemployment
Module 14: Inflation: An Overview
Module 15: The Measurement and Calculation Performance
of Inflation
Economics by Example: “Why Do We Neglect
Leisure and Cheer for Divorce?”

In December 1975 the government of Portugal—a provi- because many builders were ignoring the construction reg-
sional government in the process of establishing a ulations and using very little steel. (Travel tip: If you find
democracy—feared that it was facing an economic crisis. yourself visiting Portugal, try to avoid being in a 1975-
Business owners, alarmed by the rise of leftist political par- vintage building during an earthquake.)
ties, issued dire warnings about plunging production. Still, they went to work with the available data, and
Newspapers speculated that the within a week they were able to
economy had shrunk 10 to 15% make a rough estimate: aggregate
since the 1974 revolution that output had declined only 3%
had overthrown the country’s from 1974 to 1975. The economy
long -standing dictatorship. had indeed suffered a serious set-
In the face of these reports of back, but its decline was much
economic collapse, some Portu - less drastic than the calamity
guese were pronouncing democ- being portrayed in the newspa-
racy itself a failure. Others pers. (While later revisions
declared that capitalism was the pushed the decline up to 4.5%,
culprit, demanding that the gov- Guy LeQuerrec/Magnum that was still much less than
ernment seize control of the na- feared.) The Portuguese govern-
tion’s factories and force them to ment certainly had work to do,
produce more. But how bad was but there was no need to abandon
the situation, really? either democracy or a market
To answer this question, Por- economy. In fact, the economy
tugal’s top monetary official in- soon began to recover. Over the
vited his old friend Richard past three decades, Portugal has,
Eckaus, an economist at the Mas- on the whole, been a success story.
sachusetts Institute of Technol- A once -backward dictatorship is
ogy, and two other MIT now a fairly prosperous, solidly
economists to look at the coun- democratic member of the Euro-
try’s national accounts, the set of pean Union.
data collected on the country’s dpa photos/Newscom What’s the lesson of this story?
economic activity. The visiting ex- It is that economic measurement
perts had to engage in a lot of ed- matters. If the government of Por-
ucated guesswork: Portugal’s tugal had believed the scare sto-
economic data collection had always been somewhat in- ries some were telling during 1975, it might have made
complete, and it had been further disrupted by political up- major policy mistakes. Good macroeconomic policy de-
heavals. For example, the country’s statisticians normally pends on good measurement of what is happening in the
tracked construction with data on the sales of structural economy as a whole. This section presents three of the most
steel and concrete. But in the somewhat chaotic situation of important macroeconomic measures: gross domestic prod-
1975, these indicators were moving in opposite directions uct, unemployment, and inflation.
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