| London School of Commerce Belgrade
A Critical Analysis Of Real GDP
Subject: Managerial Economics
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
2. ADVANTAGES OF REAL GDP
3. LIMITATIONS AND SHORTCOMINGS OF REAL GDP
3.1 RENEWABLE FINITE RESOURCE
3.2 OLD AND CHILD CARE
3.3 UNDERGROUND ECONOMY
3.5 THE INFLATION RATE
3.9 INEQUALITY OF WEALTH
1. Executive summary
The gross domestic indicator (GDP) is one of the main indicators used to measure the health of a country’s economy. GDP represents the sum of all goods produces over a specific period of time or in other words it is the size of the economy. Usually, GDP is compared to the previous quarter or year. As an example, if a yearly measurement was taken and the GDP went up 3%, this means that the economy has grown by 3% over the last year. Measuring GDP can be complicated, the calculation can be done in one of three ways: the product method, the income method and the expenditure method. The first method of measuring GDP is to sum up the value of all goods and services produced in the country. Basically, we focus on firms and add up all their production. This method is known as the product method. The second approach is the income method which is focused on the incomes generated from the production of goods and services. When we look back, we will see that this is the same as the sum of all values added at each stage of production. The added value is basically the difference between a firm’s income from sales and the cost of its purchases from other firms. The difference is made up of wages and salaries, rent, interest and profit. Basically, it consists of the incomes produced by those involved in the production process. The final approach to calculating GDP is to add up all expenditure on final output. Which includes the following: consumer expenditure, government expenditure, investment expenditure, exports of goods and services and imports of goods and services. This final method is called the expenditure method. 1 Introduction
Economic production and growth, what GDP represents, has a huge impact on nearly everyone within that economy. In order to analyze the health of an economy or examine economic growth, it’s necessary to have a way to measure the size of an economy. Economists usually measure the size of an economy by the amount of stuff it produces. When GDP is calculated in relation to the population of a country this is known as the average GDP per capita. This is often used as an indicator of a country’s standard of living. When calculating GDP international incomes are not included, even those earned by domestic workers in other countries. However, as a measure of the standard of living in a country, GDP has its limitations and shortcomings.
2. Advantages of real GDP
You can use GDP to examine all economies of the world, from the USA to Somalia. No matter if a country is churning out fishing equipment or cars, all of its products have a certain monetary value, which added up gives a universally recognized measure. This measure is especially helpful if you consider how different economies around the world are in terms of the goods and services they produce, and the way they reinvest their income – pay back debts or invest in industry sectors. GDP is dynamic; it changes constantly based on new figures on productivity, consumption and investments. Therefore, economists and decision makers can use GDP to measure an economy’s growth or decline. However, they can only do that provided they have an established and accurate mechanism to measure GDP value regularly; without that, they...
References: 1. John Sloman & Dean Garratt (2010), Essentials of Economics, 5th Edition, Prentice Hall. (Pages259-267)
2. (John Sloman. 6th edn , 2006).
3. Oliver Blanchard (2006), ‘Macroeconomics, 4th Edition, New Jersey: Prentice Hall.
4. Michael Burda & Charles Nyplosz (1993), Introduction to Macroeconomics, 1st Edition. Oxford University Press.
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