Question

1. Explain what GDP is and how is it measured.
2. Evaluate the validity of using GDP as a measure of economic output.
3. Assess the validity of using GDP as a measure of social progress. Which elements (e.g., education levels, carbon dioxide emissions, gender/racial inequality) does GDP not consider?
4. Identify and describe two alternative (multidimensional) metrics that take into consideration more than the exchange value of economic output. Do those metrics capture social progress/well-being? Explain.
5. Explain if public officials focus exclusively—or even principally—on economic growth as a measure of economic policy success. Which other factors are also salient? Why?

Answer 1

Answer)

GDP is the total value of goods and services produced within an economy during a given period of time.

GDP is measured memory using D three methods

Expenditure method
Gross value added method
Income method

In the expenditure method, the expenditure by all the individuals and firms are taken into account including the government expenditure. Example consumption expenditure by the individual, investment expenditure by the private firms and government along with exports and imports.

Income method - the incomes of all the individuals are added to calculate the GDP. For example, rent, wages etc.

Value-added method
value added at each stage of production is taken into account and the final value of GDP is calculated. For example, wood furniture manufacturer converts the raw wood into the furniture, then the value added is equal to the value of furniture minus the value of raw wood.

Although GDP is considered as a measure of output but there are some limitations to relying on GDP as a perfect measure:

(i) there are some activities which are operated in the black market or in other words the underground economy such as gambling, drugs smuggling, and similarly, there are some activities which are performed in the informal sector in an economy such as babysitting, homemaker services. Income generated from these activities is not included in the GDP.

(ii) Increase in GDP means that output in the economy has increased and the individual income has also increased, but there might exist the inequality in the distribution of the income. For example, if 10% of the population has the 80% of the share in income and rest of the 90% of the population has 20% share in the income, then the income is shared unequally and thus GDP is not a correct measure of well being.

(iii) Sustainability
An increase in GDP is not sustainable if the natural resources are getting depleted as in the long term the GDP would ultimately decline due to the decline in the natural resources.

(iv)
Depreciation of capital

Although GDP is considered the investment in the economy as a part of the total output, but ignore the depreciation of the machinery that occurs during the production process. So, in this way GDP does not give the accurate picture of the total output in the economy.

GDP validity as a measure of well being:

Although GDP captures the total value of output in economics, but it fails to fully capture the social well being in society.
Example it does not indicate the overall level of education in society. Merely increase in GDP does not mean that the population is also getting literate.

Similarly, the level of health cannot be calculated from the GDP. Even if the GDP of a country is increasing, there might be instances that the mortality rate is increasing in that country as the health services are not being provided adequately to the population.

To conclude we can say that the GDP considers only quantitative measures of output in the economy, but does not consider the qualitative factors that have huge impact on the society.

GDP does not consider Racial inequality, education.