Gross Domestic Product and Living Standards - Essay Example

This paper is being carried out to evaluate and present three equivalent approaches in calculating the GDP: the value-added approach which looks at the production of firms; the income approach which determines where firms spend their revenues; and expenditures approach which assesses where households spent their income (How Do We Measure GDP 1). Though all these approaches come up with the same value for GDP, the most commonly used method is the expenditure approach. In this equation, consumption and investment represent the amount spent on final goods and services.

Meanwhile, the export minus imports in the equation which is often referred to as net exports is a method of adjusting the expenditures on goods produced abroad (imports) and adding back in the products and services not consumed domestically (exports). where private consumption represents most of households expenditures on food, housing, etc.; where government consumption represents the sum of governments spending on final goods and services such as salaries of the public servant, purchase of weapons for the military, etc.

; where investment is defined as business investment in the economy, and net exports show the difference between gross exports and gross imports (Gross Domestic Product 2-8). GDP is one of the most popular measurements of wealth in a certain country. As discussed above, GDP measures the amount of production in a certain economy on an annual basis. Since the amount of production is an indication of how much input an economy has and how efficient its technology is in converting these input into final goods and services, it is also a potent indicator of the capacity and capability of an economy.

A rise in real GDP indicates a rise in the overall production which also signals more efficiency in the economy in the utilization of its resources. Using another approach, the GDP is also an implication of the amount of wealth in the country as it sums up the expenditures of all the players in the economy. Viewing it in another way, GDP is an indication of how much money each sector has in the economy to be able to purchase final goods and services. In short, GDP is an indicator of a country's purchasing power as GDP represents the sum of purchases all the economy players make in a year.

GDP is therefore argued as one of the indicators of an economy's standard of living as an increase in GDP signifies more goods and services being produced and consumed (GDP and Living Standards 1). GDP can also be used as an indicator of the problems that an economy faces at a certain time. As GDP is composed of the performances of actors in the economy, the equation is used to pinpoint a certain sector which is not performing efficiently. For example, a decrease in GDP is observed in a certain year.

The cause of the contraction of the GDP can be traced in the equation by looking at the values recorded by different players.