Gross domestic product or , or GDP, is the value of all final goods and services produced in the economy in a year. Final goods and services are goods and services are goods and services that are bought by their final user and not used as inputs in the production of other goods and services. the key thing to note is that GDP does not include all the goods and services- called intermediate goods and services – that businesses buy from each other to use in producing what they eventually sell to final users. To measure GDP, we add together the value of final goods and services produced. So we measure GDP in dollars.
As a result, GDP is a mixture of real quantities- the amounts of final goods and services produced- and dollar quantities – the prices of the goods and services. A change in GDP, therefore, contains a mixture of the effects of changes in prices and changes in the quantities of final goods and services produced. to distinguish price changes from quantity changes , we use the concepts of nominal GDP and real GDP. (Mc Taggart & Findlay& Parkin, 1999) Nominal GDP measures the value of the output of final goods and services using the prices that prevailed at the time of measurement, or current prices.
It is sometimes called current dollar GDP. Real GDP measures the value of the output of final goods and services using the prices that prevailed in some given or base year. It is sometimes called constant dollar GDP. Comparing real GDP from one year to another enables us to say whether the economy has produced more or fewer goods and services. Comparing nominal GDP from one year to another does not permit us to compare the quantities of goods and services produced in those two years , because some or all of the increase in nominal GDP could come about simply because prices rose in that year.
(Mc Taggart & Findlay& Parkin, 1999) GDP can be calculated in three different ways. The first method of measuring GDP is to add up the value of all the goods and services produced in the country, industry by industry. This first method is known as the product method The production of goods and services generates incomes for households in the form of wages and salaries, profits, rent and interest. The second method of measuring GDP, therefore, is to add up all these incomes. This is known as the income method. The third method focuses on the expenditures necessary to purchase the nations production.
In this simple model of the circular flow of income, with no injections or withdrawals, whatever is produced is sold. The value of what is sold must therefore be the value of what is produced. The expenditure method measures this sales value. Because of the way the calculations are made, the three methods of calculating GDP must yield the same result. (Mc Taggart & Findlay& Parkin, 1999) (b) What are its limitations? The figures do give quite a good indication of the level of the production of goods and the incomes generated from it, provided we are clear about the distinctions between the different measures.
But when we come to ask the more general question of whether the figures give a good indication of the welfare or happiness of the country's citizens, the there are serious problems in relying exclusively on GDP statistics. Problems of measuring national output The main problem here is the the output of some goods and services goes unrecorded and thus the GDP figures will understate the nations output. There are two reasons why these items are not recorded. Non Marketed Items. If you employ a decorator to paint your family room, this will be recorded in the GDP statistics. If however, you paint the room yourself, it will not.
Similarly, If a former grows lettuces and sells them, this output will form part of GDP. If, however, you grow lettuces in your backyard, it will not. The exclusion of these 'do it yourself' activities means that the GDP statistic s understate the true level of production in the economy. If overtime there is an increase in the amount of such do-it-yourself activities, the figures will also understate the rate of growth of national output. On the other hand, if in more or more families both partners go out to work and employ people to do housework, this will overstate the rate of growth in output.
The underground economy. The underground ( or black) economy consists of illegal and hence undeclared transactions. These could be transactions involving goods and services that are illegal, such as drugs and prostitution. Alternatively, they could be transactions that are illegal only in that they are not declared for tax purposes. Problems of using GDP statistics to measure welfare GDP is essentially an indicator of a nation's production. But production may be a poor indicator of society's well-being for the fallowing reasons. Production does not equal consumption.
Production is desirable only to the extent that it enables us to consume more. If the GDP rises as a result of rise in investment, this will not lead to an increase in current living standards. It will, of course, help to raise future consumption. The human costs of production. If production increases, this may be due to technological advance. If, however, it increases as a result of people having to work harder or longer hours, its net benefit will be less. GDP ignores externalities. The rapid growth in industrial society is recorded in GDP statistic.
What the statistics so not record are the environmental side effects: the polluted air and rivers, the ozone depletion, the problem of global warming. If these external costs were taken into account, the net benefits of industrial production might be much less. The production of certain 'bads' leads to an increase in GDP. In some cases production of undesirable things can actually count as an increase in GDP. If you have to travel a long distance to work, this is a personal cost to you, in both money and lost leisure.
Yet the provision of these transport services count as part of GDP. Total GDP figures ignore the distribution of income if some people gain and other lose , we cannot say that there has been a unambiguous increase in welfare. A typical feature of many rapidly growing countries is that some people grow very rich while others are left behind. The result is growing inequality. If this see undesirable, then clearly total GDP statistics are inadequate measure of welfare. 2 (a) Distinguish between the key features of Keynesian and Classical economics.
Keynesian argue that aggregate demand determined the level of economic activity in the economy. In the other words, the nation's production and employment depend on the amount of spending. In the simple Keynesian theory, the consumption of domestically produced goods (Cd) and the three withdrawals (W)-net saving (S), net taxes (T) and spending on imports (M) all depend on the level of the GDP. In fact, , in the model, GDP must always equal consumption of domestic goods plus withdrawals: there is nothing else people can do wif their incomes. (Sloman & Norris, 1999)