GDP A Reliable Indicator of the Well-Being of a Nation



GDP A Reliable Indicator of the Well-Being of a Nation

Introduction

Gross domestic product is the economic growth indicator that is the monetary value of goods and services produced by an economy in a given period. GDP Product refers to added value, internal refers to the production within the boundaries of an economy, and GDP refers to the variation not accounted for inventory and depreciation or appreciation of capital. (Frumkin 2006, Pg. # 255)

Discussion

GDP, simply, is defined as the money value of all goods and services produced in the economy in a given year. That is, as Baumohl (100) so vividly puts it, if we add up the “total price tag” on all “hammers, cars, new homes, baby cribs, videogames, medical fees, books, toothpaste, hot dogs, haircuts, eyeglasses, yachts, kites, and computers” (100), and so on, produced during a year, the total value that we would get for this sum is the GDP. Clearly, the higher this number the better the economy is doing, since more output is better. Also, total GDP equals total national income (see later for why this is so). So as GDP increases, so does the total national income, which is good for a country.

There is one important caveat with regard to the conclusion that the higher the GDP, the higher the output, which necessitates a correction in the way GDP, is computed. Normally, GDP is calculated as the value of goods and services produced in a year using the current or prevailing prices for that year. If the quantity of goods produced in the economy remain the same and if only prices rise, then the product of prices and quantities (or the values) of these goods and services and hence the sum of these values (i.e., GDP) increases as well. But this increase in total value does not really mean that the economy is producing any more output in real terms than it was producing before the prices rose. Therefore, if only prices rise, then this price rise might artificially inflate the value of GDP at an unchanged level of output.

Calculating GDP

There are three theoretical methods of calculating GDP equivalent: (1) Method of Expenditure, (2) Method of Income and (3) Value Added method.

1.Expenditure Method

GDP is the sum of all expenditures made for the purchase of goods and services produced within an economy, i.e. excludes purchases of intermediate goods or services and imported goods or services.

2.Added Value Method

GDP is the sum of the aggregate values of the various stages of production and in all sectors of the economy. The added value that adds a company in the process of production is equal to the value of production minus the value of intermediate goods.

3.Income Method

GDP is the sum of the incomes of employees, the company earnings and taxes less subsidies.

Uses of GDP

GDP each year is determined by three methods: by summing the income (compensation of employees, net taxes on production and gross margins of the economy), by summing the ...