Gross Domestic Product - GDP Definition

Added on - Sep 2019

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Q 1. How can we use Gross Domestic Product (GDP) to compare the standard of living over time and betweencountries?Answer. GDP is defined as “the money value of all final goods and services produced within a country in aparticular period”. It can be used to compare the standard of living across time and between countries, but it isa bit tricky because people consume a different mix of products and services at various times. Usually, theaverage standard of living is estimated by dividing GDP by total population, which is called GDP per capita.This ascertains the level of living. In order to make comparisons between the GDP of countries, it is calculatedin dollars so that a standard measure can be used for comparison. While comparing GDP across time, thegeneral change in prices or the inflation is adjusted. This is done because prices of goods change from time totime, and they should be considered while calculating the GDP. If a country says that its GDP increased from$100 to $200, it is talking about nominal GDP which is not a correct measure of standard of living but if it issaying that inflation increased from $10 to $20 and our GDP still increased from $100 to $200, then it is realGDP and a correct measure of standard of living. Real GDP is calculated as nominal GDP divided by GDPdeflator. So it can be said that nominal GDP has two parts- real GDP which when increases, raises the standardof living and inflation which when increases, does not increase the standard of living(Kitov, n.d.).So thestandard of living can be compared between two countries by dividing real GDP by the population and thenobserving which country has a higher standard of living despite the adjustments made due to price fluctuationsover time.Q 2. Discuss whether GDP per capita is a good measure of the standard of living?Answer. GDP is defined as “the money value of all final goods and services produced within a country in aparticular period”. GDP per capita is GDP divided by population and it is a popular indicator to measure thestandard of living. There are three methods to estimate GDP. One way is to add the value of the output of allproducers and then record the total output. Another way is to sum up the expenditures on output made byhouses, firms, public sector and people from abroad (minus the residents buying from a foreign country). Athird way to calculate GDP is to add income of all producers, the wages, profits, rents and taxes of aneconomy are the flipside of the value added in a given time period.But when we talk about GDP per capita, it is not a flawless measure because it fails to capture the inequalityand does not give a transparent picture of poverty. Also, it does not assess the impact of economic activity onthe environment. The value of leisure and longevity is not considered when the standard of living is measured
using GDP per capita. It certainly does not serve as a perfect indicator of the quality of life of people. For e.g.traffic jams increases in a country, hence, the use of gasoline also increases. This may increase the GDP of thecountry, but the quality of life is certainly decreasing.Real GDP per capita is better than nominal GDP per capita because, in nominal, the inflation is not taken intoaccount. But GDP per capita cannot be considered as a perfect measure of standard of living because manyaspects are not taken into account while calculating it.Q 3. Using data for a developed and developing country of your choice, estimate how long it would take forthe standard of living to double in each country.Answer. The table depicts the growth rate of GDP of USA (developed country) and India (developing country)from the previous year from 2010-2015. GDP shows the standard of living of a country. We will use themoving average method to see that when the GDP will double in each country.GDP of India from 2010-2015GDP of the USA from 2010-2015
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