When discussing about the economy of one country, people often talk about “Gross Domestic Product (GDP). However, there are a number of disagreements among economist about the value of GDP. Therefore, this essay will discuss whether or not GDP is an ideal measurement of the development of a nation. It first explores the term GDP and ways to measure it. The essay then compares GDP with Gross National Product (GNP) and Human Development Index (HDI).
According to Mankiw (2011), the value of all final goods and services in the market produced within a country in a given time span is defined as GDP. Through this definition, there is only one measure of all the value of the economic activities for a range of products, and both goods and services are included in GDP at their market value. Nevertheless, comparing the value of one product to the other is not always easy, for example it is difficult to say if an orange is more valuable than an apple as different consumers value a good differently. It is important to have criteria to differentiate the value of different goods and services. Hence, the market price was introduced in order to identify the volume of customers who are able to purchase particular products.
To measure GDP by using the market value helps to include a wide range of commodities in the market. Not only are common items such as food, clothes and other living necessity but also the housing services included in the market value. By measuring GDP this way, many business activities like market rental housing reflect the market value and become indicators of the market. Moreover, volume of owner-occupied housing can be used to measure the market rental value of a country. Nevertheless, according to Abel et al (2008), although this measurement of GDP encompasses a number of goods and services, it still does not cover some products like which are traded in informal markets.
It is ideal that all of the goods and services exiting in the market are reflected through GDP. However, in many cases measuring the value of a number of goods and services in non-market and illegal markets is impossible, this makes measuring GDP more difficult. For instance, although the vegetables consumers buy in supermarkets are included in GDP, the ones that farmers grow in their gardens are not counted in GDP. Moreover, it is obvious that the trade of illegal drugs and other products is not counted in GDP. In addition, manufacturing and trading goods and services often relate to the impact in the environment. However, the benefits of clean air and natural water are not traded in the market; and GDP does not reflect actions to reduce pollution or improve environmental quality.
There are three main methods for measuring GDP, namely product approach, expenditure approach and income approach. According to Tucker (2011) the product approach is based on value- added concept; it measures economic activity by summing the value added by all producers. In this product approach, the market value of the goods and services traded in the market are included in the economic activities. Nevertheless, the value which is produced and used up in the intermediate stage of the manufacture process is excluded.
The second approach is based on expenditure, it consider GDP from a different angle by including expenditure in national income account. GDP is measured as the total spending of final commodities within a nation during a certain period of time. The spending is categories into four kinds, which added to get the GDP (Y), they are consumption (C), investment (I), government purchase of goods and services (G), and net exports of goods and services, indicating the difference between export and import (NX= X-M).
Therefore, GDP by expenditure approach is formulated as follow: Y= C+ I + G+ NX (Brezina, 2012).
The third method...