GDP of a country is the sum total value of all goods and services produced in a country over a given period. It can also be seen as the size of the economy of a country. It is used expressed as a percentage to give the comparison of the growth of the economy for different periods in a year. GDP can be measured using income approach where all gains to individuals in a nation are added up or calculated using expenditure approach where we only sum up the spending of all people in a country. GDP has got its fair share of pros and cons just as other economic indicators in a country. GDP has a significant impact on everyone in a country.
Some of the advantages of GDP include helping policy makers and analysts to guide, adjust and implement economic policies which are critical for the development of any nation. GDP as well serves as a simple indicator of the social and economic welfare of a countrys population. It can also be used in different parts of the country to compare economies of the various countries. More importantly, GDP serves as a barometer of the current business environment sending a clear message to government and business leaders to adjust different contingency which may adversely affect the economic growth of a nation. Lastly, GDP helps in giving analysis or a better measure of the economies activities in a country (Avakov, 2010).
GDP has got some disadvantages which include its failure to include non-market activities which occur outside the market economy and have no price attached to them. These activities include volunteer workers, barter trade activities and unpaid house helps. Another disadvantage of GDP is the fact that it does not contain how the resources are distributed and further does not imply the level of economic welfare of the countrys population.
GDP helps policy makers and analyst to guide, adjust and implement economic policy quickly. Economist uses this information of GDP to come up with information which guides the country towards achieving its economic goals. GDP measure shows the state of the economy and instances of economic depression and recession can be intervened well early in advance. Formulation of the economic policies are guided by GDP levels which enable the decision makers, and analysts be able to come up with right policies which make them applicable in the real life situation.
Analysts will use this information of GDP to evaluate and compare the purchasing power parity in different countries a move which enables them to gauge which country is doing better than others economically. These cross-border comparisons are necessary for coming up with international trade policies which enable smooth transactions in the global market. Information on GDP helps analysts to evaluate measures which could be preferably used to improve the living standards of citizens in a country (Steinfield et.al, 2006). The information on GDP will also help the analysts get the basis for calculating the per capita shows the net worth for each citizen in a country.
The policy makers can conduct investigations about the wealth distributions of a state using GDP information. In most occasions the wealth of nations are not evenly distributed and therefore information about GDP will assist the analysts to identify the cases of inequality in resource distribution and hence to be able to effectively redistribute the wealth of the nations equally to the citizens without discrimination.
Studies show that some GDP measures expenditures do not contribute to economic welfare. The level of GDP in a country do not imply the level of economic well-being of the citizens that nation. This is simply because the wealth may be unevenly distributed with a huge percentage of the resources and prosperity being in the hands of the few. GDP is calculated at the market prices, and it ignores externalities especially environmental ones. GDP also ignores a meaningful part of the economy especially that of the house helps. This happens because GDP is calculated at market price and ignores such things like home helps income, voluntary works which make the method of calculation of GDP faulty. It further fails to give an account of distributional equity and therefore this it unreliable when to provide information about the welfare of the society economically. The welfare of the human beings does not depend on commodities which are the first GDP statistics but rather it depends on the ability of such people to use those products in a way likely to increase their welfare (Steinfield et.al, 2006).
GDP and its derivatives can only be used to measure well-being in the short run and not in the long term simply because it is a measure of income and not wealth. Further, this prevents the GDP from being used for comparisons between several countries. Lastly, GDP measures of expenditure do not account for the changes in natural capital incurred during the processes of production (Stockhammer et.al, 1997). It further makes it impossible to account for the environmental changes which occur as a result of the activities aimed at improving the level of GDP in a country. Therefore these factors show clearly that GDP expenditures do not contribute to the economic welfare of the citizens of a country.
Concerns have emerged on whether GDP should take account of environmental issues revolving around the economy and economic activities. Environmental sustainability is essential in ensuring that we meet the needs of the current generation and still making future generations able to meet their needs (Stockhammer et.al, 1997). Therefore, GDP should take into account the changes in environmental since this will make sure that the figures reflected in the GDP statistics are well calculated with effects of environment included. A huge part of natural capital and ecosystem is not included in the GDP, and as a result, the GDP measure is biased. In connection to this GDP should include these environmental factors to be able to ensure the quality of life is factored through environmental issues.
DGP: Pros and Cons
- Overall indicator of development.
- Measuring growth in percentage doesn’t require much effort.
- Easy to compare with a vast majority of countries.
- Allows to measure economic progress.
- No problem to collect.
- Being a solid indicator, it can be easily calculated utilizing a specific formula commonly known worldwide.
- Helps governments to understand whether the introduced economic policies were fruitful.
- Takes only reported consumption into account without the black market. It doesn’t reflect the quality of the rendered services and goods, happiness, and political freedom.
- Can rise due to disasters. GDP can be boosted because of the economic activity when rebuilding a country after war actions or overwhelming disasters.
- Gross Domestic Product doesn’t take into account volunteer work.
- Countries having high GDP may also have a high rate of inequality.
- Income earned overseas isn’t included.
- Figures can be adjusted by governments to get impressive results.
- High DGP can be because of gun or drug trading.
In conclusion, it is evident that GDP is the measure of the total value of all goods and services in a country for a given period which can be used to compare the growth of different countries. GDP is a quantitative measure and does not imply the welfare of the society. It is evident that GDP does not take into account some of the activities which include voluntary work, housework only because they are not priced in the market. This makes the calculations of the GDP biased and inaccurate. GDP should factor out the issues of environmental changes such as the natural capital and ecosystems which are vital in ensuring that welfare of society is improving. Therefore considering these environmental matters that ensure that the quality of life is put into consideration when evaluating GDP and predicting living standards in a country.
Avakov, A. V. (2010). Two thousand years of economic statistics: World population, GDP and PPP. Algora Publishing.
Steinfeld, H., Gerber, P., Wassenaar, T. D., Castel, V., & de Haan, C. (2006). Livestock's long shadow: environmental issues and options. Food & Agriculture Org..
Stockhammer, E., Hochreiter, H., Obermayr, B., & Steiner, K. (1997). The index of sustainable economic welfare (ISEW) as an alternative to GDP in measuring economic welfare. The results of the Austrian (revised) ISEW calculation 19551992. Ecological Economics, 21(1), 19-34.
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