Richard Lipsey writes: > >In reply to Benjamin Khan: As I said in my first comment on this subject, >GDP and related concepts are used by governments and private research >agencies to study such macro variables as inflation, employment., >unemployment and exchange rates. For these purposes, economic theory and >evidence tells us that it is market transactions that matter. If, e.g., >unpaid workers work more, ceteris paribus, this will not add to inflationary >pressure. But if paid workers work more, earning more income which they >spend, this will add to inflationary pressure. Three points: (i) The criterion "that matter" is a function of the use made of the evidence. When we are interested in the availability of goods and services, their being produced in the non-market sector is not necessarily relevant. (ii) If paid workers work more and, thus, produce more, there is no need for any inflationary pressure as long as they do not try, ceteris paribus, to purchase more than their additional contribution to output. (iii) As the writing of economic history teaches us, market-based estimates of standards of living are unreliable when much of production is home-consumed, communally allocated without charge, or merely appropriated by extortion (military or criminal). All three were dominant for all but the last few centuries. Until recently, a great portion of home consumption on the Israeli kibbutz was provided according to need and without charge. I recall discussing with an Israeli economist a few years ago the problem of GDP calculation in those old days and the procedural adjustment to be made in the modern era when market exchange has become quite common within such communities. Jesse Vorst