Measuring production in terms of GDP - Essay Example

and Section # of Measuring Production in terms of GDP One of the strivings of any person in this world is to attain a better standard of living. Similarly the aim of any nation is also to attain higher standards of living. In this era of competition where economic supremacy can impact various other aspects of a given nation, the need of monitoring economic performance has gained a special attention among the nations. In this regard the economists worldwide has suggested various measures amongst which Gross Domestic Product commonly known by its abbreviation of GDP has become the most popular indicator that measures the health of the nation’s economy which in turn impact the standards of living of the nation.

What GDP Measures GDP is intended to measure the overall economic health of a particular region limited by geographical boundaries and time, usually a year. It is also called the size of the economy while it is calculated by considering the market value of all the goods and services that the economy produces; usually it is used as a proxy to indicate and judge the standards of living of a particular nation. However, despite its popularity, it has some limitations such as its inability to encompass non-regularized economy which includes activities such as smuggling.

Moreover it fails to determine the value of the services that are not compensated monetarily such as the housework that we do in order to save some money for ourselves. How good a measure GDP is? Despite the fact that GDP is preferred worldwide to measure the wealth of an economy, yet it has been criticized for reasons such as its inability to measure the qualitative aspects of the economy. For instance a nation may post a higher number of GDP on the pretext of spilled costs which may include a natural calamity.

Moreover, a small country like Luxembourg which ranks 68th on GDP scale has much better standard of living and is considered wealthier and more economically stable than a country like India which ranks 9th on the list of GDP scale. This is due to the fact that the measure ignores the number of people residing in a particular nation, and therefore, one cannot solely rely on GDP in order to judge the quality of the nation’s economic strength. Moreover GDP is not capable enough to cover the black economy, unpaid market activities such as housework and many other aspects that determine the economic stability of the economy.

Alternatives measures to GDP and why it is still in use Since GDP has its limitations, therefore many other indicators have been designed to measure the economic health of a region. These measures which are based on GDP themselves include measures such as GDP per Capita, Gross National Product, GNP per Capita while some other measures such as Poverty rate, Gini’s Coefficient, Unemployment rate and inflation rate can be reviewed simultaneously to assess the position of the economy in a relatively better manner.

While GNP calculates overall national income of the country regardless of its boundaries, its limitation also lies in the fact that it ignores the headcount of the population. In order to make up for it, GDP or GNP is divided by the total population to find per capita income of the country thus inculcating the effects of the population. However, all these alternatives have been unable to inculcate qualitative aspects of the nation’s economy therefore another indicator called Genuine Progress Indicator which was proposed by Daly and Cobb in their book For the Common Good, inculcates both the economic and social aspects of the nation.

GPI not only includes GDP but income inequality, pollution, resource depletion, dependence on foreign assets and many such variables that depict the true nature of the nation’s economy and its ability to sustain. Since GPI is subjective in nature thus it is yet to be adopted as the alternative to GDP. Despite the fact that GDP has many limitations yet it has its positives. Firstly there is no other indicator on which nations agree due to its objective nature; moreover its calculations are based in monetary terms which are easier to conceive than conceiving an XYZ country having rating of 8.

2 on an ABC scale out of 10. Despite the fact that the nations agree to inculcate other aspects of economy to show its qualitative aspects, there is lack of consensus on how to calculate and inculcate such variables into the model that truly reflects the economic strength, economic sustainability and the standards of living of a given nation. Economic Indicators and Political Ramifications Political leaders use various economic indicators to direct their political campaigns. These campaigns may call for targeting indicators, such as reducing unemployment, poverty, and income inequality and inflation rate, while increasing the growth of GDP, foreign direct investment, tax revenue as well as relevant subsidies that appeal to the masses.

The campaigns also direct more basic indicators such as trade balance, defense budget (non-developmental expenditure), fiscal deficit and tax to GDP ratios are few indicators that play an important role in shaping the political campaigns and decisions of the leaders and thus influence the decision of the masses. Works Cited Bernanke, Ben et al. Macro Economics (6th edition). Addison Wesley. (Jan 2007). Gadrey, Jean et al. The New Indicators of Well-Being and Development. Palgrave Macmillan. (Aug 2006).

Costanza, Robert et al. “Beyond GDP: The Need for New Measures of Progress.” The Pardee Papers (Jan 2009)