What does GDP Stand for? What does it capture? What are its strengths and weaknesses as an indicator of economic activity?
HASS/Business school Pre Entry Access Course Economic Essay
Juan Carlos Sanjuan Zamudio
Tutor: Ms. Jacqueline Gildea
This essay explains the strengths and weaknesses of the GDP as an indicator of economic activity. It describes the meaning of the abbreviation and what it measures. It explains when it was created, why and where. The objective of this piece of work is to introduce the reader to the fascinating world of economics through its most important abbreviation.
One of the most common uses of its shortened form by economists is GDP, “which stands for gross domestic product” (Callen, 2008, p.48). It is an economic indicator created by the United States of America as a result of the Great Depression of the 1930's. Prior to the economic developments that happened during that time, the States did not have proper measures to manage their economy efficiently. The results of their efforts created the efficient innovations that made a more stable economic environment (Survey of Current Business, 2000). In fact, “depressions that were recurring problems before World War II became a thing of the past. The business cycle was not eliminated, but its severity was curtailed” (Survey of Current Business, 2000).
The GDP “is usually calculated by the national statistical agency which compiles the information from a large number of sources. In making the calculations, however, most countries follow established international standards. The international standard for measuring GDP is contained in the System of National Accounts, 1993, compiled by the International Monetary Fund, the European Commission, the Organization for Economic Cooperation and Development, the United Nations, and the World Bank”. (Gallen, 2008, p.48).
The analysis of the word GDP can be broken down into three words, each having its own special meaning. Firstly, domestic, means that it is a domestic product, and more specifically that, “the exclusion of income generated by overseas assets explains why it is called “domestic” product”. Gross refers to a gross of depreciation. What that means is that, “the term “gross” refers to the fact that there is no deduction to reflect the depreciation or wearing out of fixed assets”. Product refers to an item which, “can be calculated at market prices or factor costs”. “GDP can be calculated by adding the sales values of all finished goods produced during the year, which is the same as totalling expenditure on finished goods, as explained above. This sum will produce a figured called “GDP at market prices”. “As the measure is expenditure based, it is not affected by the problems of double counting income tax payments that are simply transfer of income within the economy. However, it is affected by expenditure taxes, such as VAT, and subsides. Market prices include these taxes and subsidies” (Kaplan Publishing, 2008, p.191).
After this essay disclosed the meaning of this well-known abbreviation, it is convenient to explain what it captures. “GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year). It counts all the output generated within the borders of a country” (Gallen, 2008, p.48) “and excludes any income generated by assets held by the country´s residents abroad” (Kaplan Publishing, 2008, p.191). “GDP is composed of goods and services produced for sale in the market and also include some nonmarket production, such as defence or education services provided by the government” (Gallen, 2008, p.48). In fact, “GDP aims to best capture the true monetary value of our economy”. (Khan, 2014)
This important economic indicator does capture the economic value of the economy of a country. As it is stated in the...
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