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GDP growth

By miranda1010 Oct 07, 2014 809 Words
GDP

GDP (gross domestic product), is the market value of all final goods and services produced in a country in a given time period. This definition has four parts: Market value, final goods and services, whether it was produced within a country, and the time period. GDP is a market value, which means that goods and services are valued at their market prices. A final good (or service), is an item bought by its final user during a specified time period, a final good contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service, and excluding intermediate goods and services avoids double counting. It measures production within a country—domestic production, in a given time period, which is usually a year or a quarter of a year.

One of the limitations of GDP is that it does not give any indication of income distribution. Although GDP may be increasing, this wealth may be only going to a select few in the economy, which decreases equity. Moreover, GDP includes expenditures that do not increase standards of living. For example, traffic congestion may increase GDP as a result of the increased fuel consumption, but time is wasted while traveling. Costs related to natural disasters and the cleaning up of pollution are also accounted for as positives in GDP. Furthermore, non-market activity is not accounted for in GDP, many services that people have received from family members in the past for free are now purchased on the market- this may translate to a rise in income and standards of living, although currently this is not the case. Anything in the informal economy will not be recorded, as many people wish to avoid government taxation. Non-monetary services contribute an important role to economic activity, yet they are not reflected when calculating GDP. More importantly, one of the most fundamental limitations of GDP is that it fails to take into account the effect economic expansion has on the environment, which has issues concerning sustainability. When growth encroaches too much on surrounding ecosystems, we will begin to sacrifice natural capital such as fish, minerals, and fossil fuels, which have more economic value than man-made goods. If we continue to deplete these resources they will no longer be available for future generations to benefit from. We are facing a looming environment crisis, especially over concerns of global warming, yet carbon emissions are not reflected in GDP. Clearly, if the environmental costs of production and consumption were reflected, measures of economic performance would look vastly different. Calculation of GDP is also very difficult, for instance ‘double counting’. Figures get revised, during the recent recession, it was thought to have ‘double dipped’, but later estimated showed this to be false. The data given can sometimes be contradicted by other data, such as unemployment.

Despite it’s limitations, GDP is hard to replace because it provides one summarized figure, which is comparable between nations. In a single number you get an idea of whether the economy is expanding or contracting, and this can be comparable over time. In general the main trends in the economy can be seen accurately, especially once revisions to the first estimates have been made. At face value, GDP is only supposed to be a measure of the value of production, however, since GDP is used as a measure of people’s wellbeing there needs to be more incorporation of quality of life factors that go beyond measuring output. These factors include health, education, political voice, social interaction and the environment. Furthermore, in order to make GDP a more useful measure of economic health and well being, focus should be taken away from production into income and consumption, as material living standards are more closely associated with these measures. In addition to this, the indicator should also reflect distribution of income. Particularly, measuring government provided services, such as education, should be improved as these contribute a vital role to economic activity and benefit society greatly. Lastly, GDP could be improved through broadening income measures to non-market activities, by showing how people spend their time over years and across countries to give a better reflection of change. In conclusion, economic growth is usually characterized by a rise in the living standards of people. GDP is the most commonly used method to measure growth. However, it has many limitations, which restricts its usefulness. If GDP is used as a measure of wellbeing, it needs to be improved or alternative measures need to be sought, as human wellbeing incorporates various factors that are separate from material wealth, but if the definition of growth it is trying to measure is simply the expansion of output of goods and services, then the figure currently used is perfectly satisfactory.

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