Question

Discuss how gross domestic product (GDP) is used to determine the health of an economy. In this discussion, please address how GDP serves as an economic indicator.

Answer 1

Gross Domestic Product (GDP) measures the market value of all final goods and services produced within a nation in a given period of time frame. Therefore, GDP measures continuous flow of money from households to firms in a nation and then back to households in the whole economy.

The trend of the GDP growth rates is the significant indicator of macroeconomic fluctuations (business cycle), which include boom, expansion, contraction, and recession. Hence the real GDP is used to explain how well the overall economy of a nation is performing, and GDP per capita is used as a natural measure of the economic well-being of the average individual in a given nation.

However, there are disadvantages in using the GDP as a measure of national income as well as a measure of economic well being. They are as follows:

1) GDP does not take into account the value of non-monetized activity

2) GDP does not take into account the sustainability of future GDP

3) GDP does not differentiate among more or less productive economic activity. GDP implicitly makes an assumption that economic activity is the desirable ends rather than a means to an end