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Gross Domestic Product Master - Essay Example

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The well being and economic performance of a country is often directly measured through the value of its Gross Domestic Product (GDP). The most common computation of GDP is called expenditure method which aggregates the country's consumption, investment, government spending, and net exports (Parkin 2003)…
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Gross Domestic Product Master Essay
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Gross Domestic Product Master

Download file to see previous pages... The following table shows the nominal and real GDP of UK from 1948-2005 expressed in terms of country's domestic currency.
Typically, an economy's GDP is expressed in nominal terms. Nominal GDP is measured in current prices, that is, each final good or service produced by the country is valued at the current price that it was sold (Begg, Fischer and Dornbusch 2000). Because it is a measure of production terms of current prices, nominal GDP directly reacts to increases and declines in prices or quantities of goods. Because GDP is primarily the market value of all goods produced, nominal GDP is not an efficient measure of an economy's actual level of production (Begg, Fischer and Dornbusch 2000).
Real GDP, on the other hand, recognizes that the price level of goods and services produced by an economy changes over time which causes the movement in the value of GDP. It should be noted that an improvement in nominal GDP can be bloated by the mere increase in price level due to inflation. Thus, real GDP eliminates this possibility and renders a more accurate measurement by expressing the value of total production in terms of constant prices. In the computation of real GDP, the price level in a chosen base year is kept constant and functions as a deflator of the nominal GDP (Sloman 2003). Because changes in real GDP are solely brought about by more efficient and higher level of output, they are often referred to as economic growth rates.
To what extent can a measure of GDP really measure the well-being of a country Assess the problems and suggest alternative measures or indicators.
Currently, GDP is the most popular measure of the economic performance and well being of a country. It should be noted that the rise in GDP is almost often directly equated with economic growth. In a practical sense, the use of real GDP in assessing the health of an economy is somehow "satisfactory" as it indicates how materially well-off the population is. Since GDP eliminates the possibility of double counting by computing production via the value added, it gained recognition as an accurate and comprehensive measure of an economy's output over time. Even Paul Samuelson, Nobel Laureate, describes GDP as "truly among the great inventions of the 20th century, a beacon that helps policymakers steer the economy toward key economic objectives (Is GDP a Satisfactory Measure of Growth 2005, pg. 1-3)."
However, amidst all the popularity and recognition that it receives, the appropriateness and adequacy of the GDP as an indicator of economic welfare is challenged because it only "measures the total market value of production but tells little about how economic returns to factors of production are distributed among society" (Messinger 1997). Amidst its widespread use, GDP receives criticisms because of its simplistic view of the components of economic performance and welfare.
GDP also fails to include all the production in the economy since its computation does not take into account production outside formal marketplace such as underground market, unpaid housework, childcare, and even volunteer work. Also, GDP does not consider changes in leisure which directly accounts the opportunity ...Download file to see next pagesRead More
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