Gross Domestic Product (GDP) is defined by John (1999) as the total market value of all the final goods and services produced within a nation's borders in a given time period. Each goods and services produced and brought in the market has a price. The price of the total output is called as GDP. It can be measured by either cumulating all the income earned in the economy or all the spending in the economy and both measures should roughly equate to the same total. Real GDP is the total GDP has been adjusted to remove the effects of inflation. This allows one to compare GDP figures and changes from one country to another other time and thus evaluates what a country's economy is actually worth in terms of particular year's product prices.
In nowadays, real GDP is widely used by policymakers, economists, international agencies and the media as the primary scorecard of a nation's economic health and well-being. People believe that the standard of living is closely tied to the real GDP. This generally signifies that the economy is wealthier and producing more, individuals are better off, and that living standards are higher. However, people more recently argue that real GDP in certain circumstances could not fully represent people's standard of living. In this essay, I am going to examine the extents in detail by analyzing the real GDP from different perspectives. However, the essay will mainly address the limitation of real GDP to show that real GDP could not represent the correct value of the economy; therefore it may not adequately measure the standard of living.
Real GDP only includes the total domestic production of an economy and the output of some goods and services are unrecorded, which in the long run results understate the total real GDP. We can view this problem from national and international perspective. First, we look at the national level. In a country, items which are not made to sell in market are excluded from the real GDP as there is no money exchange in hands. For in stance, someone plants vegetable for himself and does not take the vegetable to market, the value of the vegetable is not included in the real GDP. However, if this person sells the vegetable in the market, the value of the vegetable adds to real GDP. Another situation is black market. Many self-employed people normally undertaken their job privately, therefore they are usually paid by cash. If they don't declare their income for tax purpose, then this type of income is excluding from real GDP as well. Consequently, real GDP may even not be able to reflect the correct value of a country's economy as a whole from national perspective. It is hard to say it could adequately measure the standard of living.
From the international perspective, real GDP measure the output of the home economy of a country and thus excludes over-seas enterprises that may be taking place. In a world which is increasingly globalising and in which Trans-National countries are becoming increasingly important, this can be significant in some cases. For example Japan has many over-seas enterprises; particularly car-factories which often locate in the EU to produce cars for the EU there at a lower cost inside tax barriers imposed by the EU. However, these companies act somewhat as a drain to these EU economies and a boon to the Japanese economy as they send back considerable profits made to Japan to be used in further investment rather than directing money earned into the economy where the factory is located. In effect, consumer spending in the EU countries is still sent to the firms as expenditure for their services, but it is Japanese firms that the money is being sent to: it is foreign spending boosting the Japanese companies and thus indirectly their economy. These external monies earned over-seas are...