Gross Domestic Product and Economic Welfare - Essay Example

GDP Gross Domestic Product (GDP) and Economic Welfare A countries economic growth is always interpreted in terms of Gross Domestic Product (GDP). The country with higher GDP rate will be considered as a developing or developed country whereas the countries with low GDP rate as economically poor countries. Since economy of a country controls the social, cultural, political development of a country, the people residing in countries with better GDP rate will have better livelihood. The standard of living in a country is directly linked with the GDP. When GDP increases the standard of living also increases and vice versa. GDP also shows the productivity of a nation. Countries like China and India have better GDP rate compared to U.S. as per the latest studies. The recent television reports has shown that the American secret agency has submitted a report to the Bush government that India and China will become super powers within 20 years. What is GDP? “The monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX where: "C" is equal to all private consumption, or consumer spending, in a nations economy "G" is the sum of government spending "I" is the sum of all the countrys businesses spending on capital GDP 2 "NX" is the nations total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)” (Gross Domestic Product – GDP) From the above definition it is clear that if a country produces maximum finished goods within a time span (normally 1 year) the GDP will increases. From the above equation it is clear that GDP will increase when the consumer spending, government spending and sum of country’s business spending increases. The GDP will also increase when exports exceeds the imports (NX value). Now we can try to analyze GDP a little more deeply by studying the GDP rate of two countries; one with higher GDP rate and another with lower GDP rate. GDP incorporates many of the economic indicators of a country such as retail sales, personal consumption and wholesale inventories etc. “The general consensus is that 2.5-3.5% per year growth in real GDP is the range of best overall benefit; enough to provide for corporate profit and jobs growth yet moderate enough to not incite undue inflationary concerns. If the economy is just coming out of recession, it is OK for the GDP figure to jump into the 6-8% range briefly, but investors will look for the long-term rate to stay near the 3% level. The general definition of an economic recession is two consecutive quarters of negative GDP growth, which last occurred in the United States in 2001. (Ryan Barnes). GDP is concerned with the region in which income is generated. It is the market value of all the output produced in a nation in one year. GDP focuses on where the output is produced rather than who produced it. GDP measures all domestic production, irrespective of the origin of producer. The GDP though considered as the indicator of economic output and growth, the assessment of the GDP should be done in proper ways to get the exact picture. Real GDP GDP 3 calculation will consider the inflation rates also in a specified time period. The GDP statistics are a great investor tool for analyzing figures and trends. GDP is often used as an indicator of standard of living in an economy, the reason being that all citizens would benefit from their countrys increased economic production. GDP is measured frequently, widely and consistently and hence we will get the data about the living standards of each country. The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. The definition of GDP suggests nothing about the standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production and imported nothing would still have a high GDP, but a very poor standard of living. Country with high GDP rate (Country A) “China’s economy may grow 10 percent next year as the “huge” potential of domestic consumption and investments counter the impact of a global slowdown, a State Council researcher said”. (Wang Ying). China and India possesses better GDP rates compared to some other developed countries as per the latest studies. We know that the Chinese products are spreading all over the world. The bulk production helps China to sell finished goods with comparatively cheaper prices in international markets. Though their margin of profit may less compare to others, this bulk production helps them to overcome all such issues. The cheaper prices of goods will create more demand for the goods in domestic and international circuits.We know that China offers the cheapest possible medical education in the world. This is possible for them because of the infrastructure development in that country. I have a doctor friend who has GDP 4 completed his medical education in China for just 10000 US dollars. It is of the order of around 100000 US dollars in some other countries which is about 10 times that of the China. Thus economical development can offer better facilities at affordable prices. The stability in their economy is reflected in the social life also. When we compare the life of people in Pakistan or Somalia with that of China then only we understand the importance of GDP and economic growth. There less number of agitations or conflicts inside China compared to other countries. Though one may argue that may be because of the strong political government led by the communist party which will destroy such agitations at an early stage itself as happened in the student agitations recently. The economic growth always leads to the reduction of unemployment by creating more and more job vacancies because of the high productivity of the production sector. Though China has the largest population in the world, the unemployment of China is less compared to the economically poor countries with fewer populations. Country with lower GDP rates (Country B) "If the country has natural resources and you cut the forest down, that increases GDP," says Yoram Bauman, who teaches environmental economics at the University of Washington in Seattle. "But its not clear that the wealth of society has increased, because the value was there all along in the trees." (Mark Trumbull). We know that country like Pakistan have low GDP due to so many internal conflicts. In fact the under developed economy causes much problems internally and more and more people engaged in anti-social activities to counter the poverty. GDP 5 These are the case in Afghanistan and also in Somalia where the people engaged in even robbing the ships travelling near their territory. Political instability is another direct result of low economic growth. The lower GDP or economy often causes internal conflicts where the people will engaged in, crimes, robbery, prostitution, etc. The low living standards agitate the people when they compare their living standards with that of the developing or developed countries. For example the internet and computers are cheaper in countries like China and India whereas it is still highly costly in countries like Somalia or Afghanistan. The high GDP or economic growth may affect the thinking of the civilians. Earlier the people of Kashmir in India considered joining the Pakistan due to political and religious reasons. Because of this the Pakistani terrorists got lot of support from the people Kashmir. But now the growth prospects of India and the under growth of Pakistan changed their way of thinking in favour of India which reflected in the recently conclude peaceful Kashmir elections which led the Pakistani terrorists attack on Mumbai recently because of the frustration. Drawbacks of GDP calculations The GDP may not provide us the correct picture of living standards always. GDP does not consider the differences in incomes between the rich and the poor. The rebuilding process after a natural disaster or war may result in lot of economic activities which may boost the GDP. The economic value of health care is another example. Expensive treatments and activities in health sector due to a contagious disease can again boost the GDP which again may not reflect the GDP 6 standard of living. The people’s buying habits also may give false interpretations about GDP and standard of life. They may buy cheap quality products more at the expense of high quality ones and hence the GDP will again increases which may not be correct statistics of the living standards. GDP will not consider the factors such as damages to environment caused by high industrialization. More and more production in most of the industrial goods results in heavy damages to the environment which may not be taken into the account while calculating the GDP. The sustainability of growth may not be considered by the GDP calculation. For example the gulf countries mostly depend on their oil wealth for boosting their economy. But these oil resources are rapidly exhausting and hence the growth may not be sustainable for them if they depend entirely on oil supply. The black market money transactions are not considered in the calculation of GDP. Cross-border comparisons of GDP can be inaccurate as they do not take into account local differences in the quality of goods, even when adjusted for purchasing power. For instance, people in country A may consume the same number of locally produced apples as in country B, but apples in country A are of a more tasty variety. This difference in material well being will not show up in GDP statistics. Conclusion Normally the GDP reflects the living standards of a country. But in some cases because of the drawbacks in calculations of GDP, it will not reflect the exact picture of civilian life in a country. GDP is associated with the productivity of the country. It also depends on the export and the import of a county made. Countries with high GDP may generally be more stable and peaceful compared to that with low GDP. GDP 7 Sources 1. Gross Domestic Product – GDP Retrieved on 30/11/08 http://www.investopedia.com/terms/g/gdp.asp?viewed=1 2. Ryan Barnes -Economic Indicators: Gross Domestic Product (GDP) Retrieved on 30/11/08 http://www.investopedia.com/university/releases/gdp.asp 3. Wang Ying- China GDP May Expand 10% in 2009, State Analyst Says- Retrieved on 30/11/08 http://www.bloomberg.com/apps/news?pid=20601068&sid=azEAvGVCMECI&refer=home 4. Mark Trumbull -Does GDP really capture economys health? Retrieved on 30/11/08 http://www.csmonitor.com/2008/0312/p02s01-usec.html Read More