Home >> Economics >> How To Measure GDP
How To Measure GDP
Gross Domestic product (GDP) is the value of a country’s total output of goods and services before depreciation. Aggregate demand is the relationship between the aggregate quantity of goods and services demanded - or Real GDP - and the price level – the GDP deflator holding everything else constant. AD = C+ I+ G + (x – m). Aggregate supply is the sum total of planned production for the whole economy.There are three methods of measuring National Income. They are Output, income and Expenditure. Ideally they should all be equal because they all measure the same thing which is the national income of a country.
The total amount of the quantity of final goods produced in each firm is the output approach. It is the least practical because it is difficult to compile the quantities of different goods into one number. Expenditure approach is when instead of counting the goods going out; they count the money coming in. It counts the total spending on the goods and the services. The national expenditure or aggregate demand in calculated by adding together the spending of the consumers on the final good and services, firm’s investment spending on capital for example machinery, government spending and the spending of foreigners on our exports less our spending on foreign imports. The equation is AD = C + I + G + (x-m). The income approach is calculated by adding all the payments of the income/Factor of production. Thus the equation is National income = wages + self-employed income + trading profits + rent + interest.
Part b) Using GDP is very useful as a measure of economic activity!
Measurements of national income are that main index for assessing economic growth within a country. But the figure should be of such a way that we can compare the figure with the figure in the previous years. Thus, such variable should be used that it can be calculated every year and can be compared. Secondly, the figure should be calculated in such a way that other countries can calculate it as well so that the economic activity can be compared with other countries in the world. This is good for Non-governmental Organizations such as UNDP and World Bank because they can use the figure to plan sustainable development projects. This is good for the government of a country because they will get a sense of where their nation stands and hopefully govern better.
We must consider nominal and real rates as well. Nominal is less accurate because it does not take inflation in to account which is disadvantageous because if the nominal GDP increased, there is a possibility that inflation affected the figures. Real is much more accurate because it adjusts for inflation. If real GDP increased from previous years, there is an actual change. For example the real GDP of India is $ 1729 billion but the nominal GDP is $ 2 trillion in 2010.
National income is a good way of measuring the economic activity because it is the fastest and the easiest which is good for economists. Statisticians and or the government because it does not require a lot of skills as it is a simple formula. It is a good indicator because it shows whether the economy is shrinking or expanding which is good for countries who want to build relations as they can see whether building a relation will be advantageous or disadvantageous. However, it is not so good because it is not the most accurate. Moreover, an increase in the national income does not necessarily mean that there was an increase in the economic activity. For example Japan’s nominal GDP was $ 26,447 in 2010 which was before the earthquake. However, the nominal GDP was 29,233 after the earthquake. This means that, the development or the progress shown through the nominal GDP partly represents the recovery from the earthquake and not wholly the actual progress made in the country.
GDP is not beneficial for the economics, politicians, urban planners, national and multinational companies, educational institutions, because it does not show the income distribution within a country or indicate the price levels. These figures should be in the same currency in order to make a comparison with other countries. For example 10 dollars (US) is not equivalent to 10 rupees (India). The exchange rate is not the same in two countries. One can buy reasonable amount of goods and services for $ 10 in India however one cannot with 10 rupees. Thus, the purchasing power of a person’s income will be different in different countries.
GDP does not reflect the standard of living although it can probably help us guess the standard of living and the quality of life of that country which is good. It shows the accessibility of goods and service of a nation which can be beneficial for the government as well. Comparing national income countries is not accurate as demographics affect the figure. Thus, GDP per capita is a more accurate measure. However, the GDP per capita does not show growth per capita. For example Canada’s GDP in 2010 was $ 1.58 trillion. However, its GDP per capita which is total GDP divided by the total population was $ 39,100 (2010). Although the GDP is really high, the GDP per capita is still relatively small.
One big disadvantage is that one cannot measure the development just by looking at the GDP as it is not sufficient to compare the countries. Therefore, a country should be compared using an index of development indicators for example the Human development index, Human suffering index, Happiness Index.
In some countries the GDP can be low but GNI and GNP can be high due to migration. Many people who migrated sent remittances back to their relatives and home country this is good for the government because it is still counted as income. For example there are many migratory Filipinos who send remittances back. Thus, the GNP of Philippines is high compared to other countries as it is $ 357.76.
There are also cases where there are two countries have the same GDP but the income distribution is unequal. Thus, the GDP does not represent the income distribution which is a disadvantage. For example the GDP is similar for Brunei and Hong Kong. The GDP per capita of Brunei is $ 49,384 dollars and $49, 137. However, the income distribution is significantly different because the income distribution is 0.43 for Hong Kong and it is 0.27 for Brunei on the Gini Index. There are other cases where the GDP is very high in the present. However, the GDP is predicted to decrease significantly if change does not take place. For example Qatar which has the GDP of $ 181.9 billion (2012), is rich in the short run because of oil reserves. However, since oil is non renewable and will run out in the near future as the oil peak has already been reached, the GDP will decrease because Qatar is not practicing sustainable development. Although the GDP is really high, it is still ranked 0.831 on HDI which is relatively low.