What is GDP - Essay Example

GDP stands for Gross Domestic Product. It is the total value of output of goods and services produced in an economy over a given period of time, say one year. This definition of Gross Domestic Product (GDP) shows that in order to arrive at the GDP (Gross Domestic Product), we need to have it over a period of time and this period cannot be an indefinite period because then the definition will become absurd and there will no point in calculating the GDP as the country will not be able to use this figure for comparisons. So, it is very essential to have a GDP for a country calculated over a definite time period. In order to further explain the definition, I will take the example of Qatar. The GDP of Qatar is the total value of output of goods and services produced within Qatar over a period of time. The definition of GDP includes all the production done by local residents and resources owned by the residents of Qatar and also by foreigners and foreign resources owned by non-residents of Qatar. GDP can be measure by three methods and each method should give the same answer. It can be calculated by the output method. In this method, the value of total output produced in Qatar is its GDP. It can also be calculated by the income method. Since selling of output results in income for sellers, therefore in this method GDP is calculated by adding up the income of all people working in Qatar. Similarly, the GDP of Qatar can also be calculated by using the expenditure method. Since, income for one person is expenditure for others, in this method the GDP is calculated by adding up all the expenditures spent on Qatar's production. This was comprehensive account of what GDP or Gross Domestic Product is. It is often considered by people that sole GDP figures are enough for telling the economic well-being of a country. For example, the people who say this base their claim on the fact that any changes or increase in the GDP is signal of improvement in economic well-being. Similarly, these people also say that the country with the higher GDP is enjoying a higher level of economic well-being. However, one should always remember that sole GDP figures alone do not tell us about the economic well-being of a country. Although these numbers are important but when studied alone without any supporting data, one cannot predict whether the country is enjoying economic wellness or it is facing low standard of living. There are a number of reasons why we cannot rely solely on the GDP figures and need comprehensive sets of data to determine the economic wellness of the country. Suppose that a GDP of country increases by 20%/ Many people will say that the country will now enjoy great economic well being or its residents will be better-off. However, this is not true. In order to determine the net of economic wellness, we need to take into account the population growth rate as well. If population growth rate is 25%, then we can clearly conclude that people will be worse-off by this increase and there will be a net-decline in the standard of living of people living in this country. So, it is not GDP that matter, but it is the real GDP that tells us about the economic wellness of a country. Real GDP takes into account the population and it is the measure which tells us about the economic wellness of a country. Similarly, what if an increase in GDP is because of the increase in inflation. Inflation increases the price of everything and because of this the value of GDP increases. This type of increase in the value of GDP because of inflation is also not very good as economic wellness and people's standard of living is directly related to the physical quantity of goods being produced and not the quantity. So, we need to taking into account the inflation factor also and adjust the nominal GDP with inflation factor to arrive at the real GDP and only this way we can tell whether or not the country is enjoying economic wellbeing or not. A good way to counter this problem is calculating per capita income. Per Capita income is calculated by diving total GDP by the total population of a country. It is how much an individual is earning on average. Higher per capita from one year to another shows us the economic wellness of a country and it is more reliable than the sole GDP figures. This problem can be solved by comparing the GDP of two years using the same base year to remove the inflation effect from GDP total and to make the comparisons more useful. Similarly, economic wellbeing also depends on the composition of goods being produced. If currently more capital goods are being produced than consumer goods then we can safely say that there is no economic wellbeing in the country. There are chances that the production of capital goods will lead to economic wellness in the future, but currently economic wellbeing will be very low despite high GDP figures because of expensive capital goods being produced. Similarly, it also depends on the types of goods being produced. For example, if there are a lot of money being spent on the defense of a country and as result GDP is very high, then again there will be economic wellbeing because people are getting very less to consumer and much of the money is being used in the production of artilleries, tanks and other warfare items. The GDP figures might also be misleading because most of the production might be done by foreign residents and foreign resources that send their earning to their parent company. If this is high then the GDP figure will mislead us and there will be little or no economic wellbeing. In this case, a good way to determine the economic well-being of a country will be GNP (Gross National Product). Gross National Product is the value of output produced by local residents of country whether in Qatar or working abroad. This is calculated by subtracting net property income from GDP. Net Property Income is the difference between money received from Qatar's residents working abroad and money sent out by MNCs or foreigners to their home or parent company. This will give us an accurate picture of how much money is coming in or staying in our country and will give us better indication of the economic wellbeing of our country. Similarly, on the other hand, people who are against economic growth argue that quality of life cannot only be increased by income only. They state that if a life's quality is to be improved, there needs to be a better environment for them to live in. Similarly, some psychologists argue that life quality is enhanced only when a person leads a stress-free life. All these condition are violated by economic growth and hence some people talk against economic growth. For example, if you want to experience an economic growth you need to build more factories. The opportunity cost of these factories is the recreational facilities such as parks that could have been built instead of these factories. Thus economic growth results in more factories and less parks (recreational facilities, for example). This reduction in recreational facilities leads people towards a stressful life. Similarly, building of factories, leads to degradation of environment as they emit poisonous gases and hazardous chemicals. As a result of this many environmentalists talk against the economic growth by stating that it could not lead to a better quality of life. (Lipsey and Chrystal, 2002) CONCLUSION: In the light of above discussion, it can be safely concluded that high level of GDP may signal economic wellness. However, it is not a necessity that high GDP figures always signal economic well. There can be a number of reasons which will distort the GDP figure and it may not depict the economic wellbeing of a country. These reasons are high population growth rate, high inflation rates, composition of goods, materialistic approach etc. In order to arrive at whether the country is enjoying economic wellbeing or not, we need to consider factors like per-capita income, composition of good and how happy are the citizens of a country. References: 1. John Sloman (2001). Economics. Pearson Publishing 2. Collin Bamford. (2003). As and A Level Economics. Cambridge University Press. 3. Lipsey and Chrystal. (2002). Economics. Oxford University Press. 4. Manuel G. Velasquez (2001). Business Ethics: Cases and Concepts. Prentice Hall Read More