The Use and Abuse of Gross Domestic Product

This report analyzes the limitations of GDP as a measure of the well-being of society. It covers how to measure GDP, its emergence as a pivotal indicator, and the difference between real and nominal GDP. The report also examines Australia's per capita GDP over the past two decades. It concludes that despite its deformities, GDP still serves as the most considerable indicator of the economy.

ECON1007
MACROECONOMICS

Table of Contents
INTRODUCTION............................................................................................................................2
MAIN BODY...................................................................................................................................3
How to measure the GDP of an economy........................................................................................3
Reasons behind the emergence of GDP as a pivotal indicator.........................................................4
Conception of REAL and NOMINAL GDP...................................................................................4
Australia's per capita GDP over the past two decades.....................................................................5
Limitations of GDP as a measure of the well being of the society..................................................6
Presentment of the data....................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES.................................................................................................................................9

INTRODUCTION
The most common terminology that is being used nowadays is GDP (Gross Domestic
Product). It is considered as the reference point by the government, banks and the general
business associations in terms of defining the economic structure of the country. A detailed
investigation on the construction of the concept of GDP, its descriptive history, the way it is
determined and how it affects the social and environmental well-being in a country will be
analysed. A review of the trends being followed in Australia over the past two decades with the
help of its GDP will be examined. A comprehensive differentiation between real GDP and the
nominal GDP will also be an imperative part of of the report.
MAIN BODY
How to measure the GDP of an economy
The most appropriate definition of GDP would be the measure of the monetary value of
the final goods and services that are bought by the final consumer, specifically produced in the
market with a purpose of sale in a given period of time. It accounts to the total yield that is
generated within the boundary of a nation. Measurement of GDP can be done by :
1. Quantifying the entire lot that has been produced
2. Multiplying each of the good or services that are offered by the price it is sold at.
3. Adding up the total in the end.
The GDP of a nation is determined through three different approaches:
• Production approach: It is also known as the Value Added Approach and presents the
overall value that is contributed in the economy at each stage of the production process.
Thus, it measures the GVA (Gross Value Added) of a nation. It can be computed as:
GVA= Gross value of output – Value of in-between consumption
(Value of output = Value of total sales of goods and services + Change in the inventory)
• Income approach: Through this conceptualization, the sum of the primary income of the
residents of a country comprehensively distributed is taken into consideration. The GDP
here is also known as the GNI (Gross National Income) and it includes number of
elements such as the wages and salaries of the human resources, profits obtained, interests
paid as well as received and the income from the unincorporated businesses. Therefore:

GNI = COE + GOS + GMI + Taxes less subsidies on production and imports where COE
refers to the Compensation of employees, GOS refers to the Gross Operating surplus and GMI
infers as the Gross Mixed Income.
• Expenditure approach: This method is used as the sum of the ultimate use of all the
goods and services in terms of the purchaser's price. The components that are taken into
the chronicle are the Consumption, Investments, Government expenditure and the Net
exports represented as C, I, G and X(Exports) - M(Imports) respectively. The formula that
can be used is:
Y = C + I + G + (X-M), where Y refers to as the GDP so calculated.
Reasons behind the emergence of GDP as a pivotal indicator
Originally this concept was introduced by William Petty during the ongoing war of the
Dutch with the English because of the unfair practices that were carried out in the economy. The
further development was made by Charles Davenant in the year 1695. However the modern
approach was developed in the 18th century by an American economist, Simon Kuznet in the year
1934 and was adopted at the Bretton Woods conference in 1944 as the definite measure of a
country's economy (Aleksandrova and Khabib, 2022). Kuznet was intrigued in capturing the
multiple factors affecting the economical conditions through a single component i.e. the GDP.
The idea of formulating such a measure was because of the event of the Great Depression and the
popular yet annihilating World War II and was created to account the statistical interface that can
be used to define an economy's prevalent condition.
Conception of REAL and NOMINAL GDP
An understanding of the difference between both the critical concepts of the economy i.e.
the real GDP and the nominal GDP is quite essential (Tunc, Kocoglu and Aslan, 2022). A brief
analysis of this can be carried out in the form of a table.
Real GDP Nominal GDP
• It is the sum total of the economic yield
in a year that is produced in a country
or the actual cost without considering
• It measures the production that takes
place in a year at the current prices and
therefore it is considered to be a much

any kind of effects that can occur.
• It is a complex and a tangled
phenomenon to measure.
• The growth can be determined in a
more realistic manner through the use
of Real GDP.
more befitting measure of the GDP
• It is relatively easy to compute
• The economic growth of the country
cannot get a suitable analysis with the
help of this.
Australia's per capita GDP over the past two decades
The economic system of Australia is highly influenced by the service sector and despite
of that the success that they achieve is because of the contribution from the mining (13.5% of the
total GDP) and agriculture (2 % of the GDP) sector, because of the fact that the country is among
the major exporters of the essential commodities. Manufacturing sector contributes to about 11%
and the construction with 9.5% share in the economy. Other sectors such as the region of Public
administration and basic utilities also influences it with a considerable mount of share (Higgs,
2022). Talking about the overall growth in the economy of Australia, there has been a decrease in
the annual growth rate from 3.93% to -0.20% in the last 20 years as per the ABS. The country
experienced a downfall in the year 2020 and the reason behind such impact can be the emergence
of the pandemic (Dasgupta, Managi and Kumar, 2022). Australia was compelled to shut their
borders down to prevent the further spread of COVID-19 which adversely affected their
economic conditions. Furthermore, past 20 years data has been sourced from the reports put
forward by Australian Bureau of Statistics (ABS), which stated the flow of the dynamics of the
country's financial position.
YEAR GDP GROWTH (%) ANNUAL CHANGE
2020 -0.20% -2.45%
2019 2.16% -0.79%
2018 2.95% 0.65%
2017 2.30% -0.47%
2016 2.77% 0.58%
2015 2.19% -0.34%
2014 2.53% -0.05%
2013 2.58% -1.33%

2012 3.92% 1.46%
2011 2.46% 0.40%
2010 2.07% 0.13%
2009 1.94% -1.72%
2008 3.66% -0.19%
2007 3.84% 1.05%
2006 2.79% -0.41%
2005 3.20% -0.85%
2004 4.06% 1.07%
2003 2.99% -1.02%
2002 4.00% 2.07%
2001 1.93% -2.00%
2000 3.93% -1.14%
Table 1: Australian Bureau of Statistics (ABS), 2021
GDP GROWTH (%) ANNUAL CHANGE
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Limitations of GDP as a measure of the well being of the society
It is considered to be an indicant of the standard of living of the lodge but certainly is only
a scratchy one as it does not accounts the leisure, impact on the environmental quality, health and
the level of education present in the economy (Oboohov, 2022). Considering the different
aspects, an inference can be made:
• When a consideration is made over the comparison of the per capita GDP of Germany
with the GDP of the USA, USA automatically wins the race but that does not mean the
standard of living is apprehensive in the winner's locality (Van Hoa, 2022). In order to
present an actual representation of the sustainability, GPI (Genuine Progress Indicator) is
the indicator to make use of. This includes the level of pollution (air, water and land),
modes of depletion in the environment, illegal activities being carried out in the economy
and number of other problems.
• The government's expenditure over the acts of environmental protection is definitely
included in the GDP computation but the actual level of the environmental conditions i.e.
the cleanliness pertaining, conditions of the health of the citizens and the social effects are
not compiled. GDP considers the mortality rates but does not provide an explanation of its
occurrence in a specific manner (Pannell and Rogers, 2022). HDI (Human Development
Index) is the correct measure to consider for covering the basic dimensions of Human
Development i.e. life expectancy at birth, literacy ratio and GDP per capita in terms of the
purchasing power in terms of US dollar.
• There are number of cases where the presence of GDP is not even clear in order to
determine whether is is a fruitful indicator or not. For instance, when a city or a locality is
struck by a hurricane then the construction of the new establishments takes place which
turns out to be economically beneficial for the country (Alaminos, Salas and Fernández-
Gámez, 2022). GDP on the other hand has no say on the value enhancements mechanisms
and most of the time lag behind in considering the other varied aspects of the economy.

Presentment of the data
The limitations so put forward presents the actual picture of the indicators that are
considered in this report. Their actual representation can be put forward through the use of the
reputable sources.
HDI: The top 10 countries were taken to measure their respective HDI
Illustration 1: Human Development Index (HDI) Ranking, 2020

GDP:
The projection of the ranking of the different countries was put forward by the the apex World
Bank for the year 2021. the top 10 countries that stands out were:
CONCLUSION
The overall conclusion that can be inferred is that despite of the deformities in the
structure of GDP, it still serves as the most considerable indicator of the economy. It provides a
thorough picture of the economical condition in a given period of time which helps in
determining the actual position of a nation. In context to the analysis of Australia's GDP, an
inference can be made that in the present scenario, it experienced devaluation in terms of the
growth of the GDP. Referring to the deformities in the calculation of GDP, other socio-economic
indicators can be used and thus the areas where GDP fails to perform can be compensated with
their respective usage. Despite of the fact that it does not cypher the broader standard of
surviving, it still is a powerful measure that demonstrates the sphere of production in a decent
manner. To determine the economical condition of a country, the usage of GDP as an indicant
which anyway is advised to state whether a nation is performing well or not.

REFERENCES
Books and Journals
Alaminos, D., Salas, M.B. and Fernández-Gámez, M.A., 2022. Quantum computing and deep
learning methods for GDP growth forecasting. Computational Economics, 59(2),
pp.803-829.
Aleksandrova, A. and Khabib, M.D., 2022. The role of information and communication
technologies in a country’s GDP: a comparative analysis between developed and
developing economies. Economic and Political Studies, 10(1), pp.44-59.
Dasgupta, P., Managi, S. and Kumar, P., 2022. The inclusive wealth index and sustainable
development goals. Sustainability Science, 17(3), pp.899-903.
Higgs, K., 2022. A Brief History of The Limits to Growth Debate. In Sustainability and the New
Economics (pp. 123-136). Springer, Cham.
Oboohov, P., 2022. Workers' share of GDP drops to 50%. Green Left Weekly, (1337), p.8.
Pannell, D. and Rogers, A., 2022. Agriculture and the environment: Policy approaches in
Australia and New Zealand. Review of Environmental Economics and Policy, 16(1),
pp.000-000.
Tunc, A., Kocoglu, M. and Aslan, A., 2022. Time-varying characteristics of the simultaneous
interactions between economic uncertainty, international oil prices and GDP: A novel
approach for Germany. Resources Policy, 77, p.102658.
Van Hoa, T., 2022. A Note on: Alternative Quantitative Measurements of Growth and Welfare for
Policy Analysis. International Economics Studies, 36(1), pp.65-68.