Question: Part of Gross Domestic Product consists of production in the
Part of Gross Domestic Product consists of production in the so-called FIRE. Sector (finance, insurance, and real estate). Value added is notoriously difficult to measure in the FIRE 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 the production of apples, for example. Recently, there have been several high-profile financial scandals, for example the Enron affair, and the Madoff scandal in New York, where financial firms and individuals earned large incomes but actually provided little or no financial services. Discuss the implications that such criminal financial activity has for the measurement of GDP.
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