GDP (Gross Domestic Product) is a term used by economics to measure the economic health of a nation. It provides information of the monetary value of all finished goods and services within a specific time frame, usually a quarter or annually.
However, GDP has certain boundaries as it does not calculate elements such as economic wellbeing or depreciation of assets. Therefore, economists developed statistical tools to evaluate the shortcomings of GDP. Observing the trends and GDP, a nation can reform policies, strategize business decisions.
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These tools do not act as a substitute to GDP calculation but as complimentary tools to gain precise evaluation of a nation’s economic growth.
GDP = Consumption (C) + Investment (I) + Government spending (S) + Net exports (NX)
GDP can be observed with three approaches called production, expenditure and income approach. It is the summation of value with three different perspectives of economy. However, the final value of GDP remains the same with all three methods.
The production approach sums the final value of product and services differencing the intermediate factors.
The expenditure approach sums the final value of purchases and the income approach sums the income generated production.
GDP calculation is the backbone of information of size and the performance of the nation.
Drawbacks of GDP is that it does not indicate the general health of the economy, in simpler words it means that factors such as inflation, employment rate, recession is often neglected which is crucial for knowing the economic prosperity. The term Real GDP implements tools for adjustments called GDP price deflator, it is the difference in prices between current and base year.
There are certain special considerations when comparing GDPs of two countries as population and cost of living, income is not consistent.
A general method is to convert it in US dollars to compare. The conversion can be done by market exchange rates or purchasing power parity (PPP). PPP is the rate of purchasing power of same goods and services between two counties. Emerging markets have a wide gap of the two rates compared to developed nations. Calculation of GDP per capita and HDI are two examples which compliments to GDP.
References
Callen, T., 2020. Gross Domestic Product: An Economy’s All. [online] www.imf.org. Available at:
Gil-Alana, L., Skare, M. and Buric, S., 2019. Testing Okun’s law. Theoretical and empirical considerations using fractional integration. Applied Economics, 52(5), pp.459-474.
Gittins, R., 2020. It may be a terrible recession, but it could have been worse. [online] Rossgittins.com. Available at:
Academic Questions
Question: Is the Gross Domestic Product (GDP) concept a good measure of welfare? Compare the welfare of any two countries using GDP per capital and the United Nation’s Human Development Index (HDI)
References
Callen, T., 2020. Gross Domestic Product: An Economy’s All. [online] www.imf.org. Available at:
Gil-Alana, L., Skare, M. and Buric, S., 2019. Testing Okun’s law. Theoretical and empirical considerations using fractional integration. Applied Economics, 52(5), pp.459-474.
Gittins, R., 2020. It may be a terrible recession, but it could have been worse. [online] Rossgittins.com. Available at:
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