Question

What is GDP?

What is the difference between the nominal GDP and real GDP?

Explain why comparing the GDP’s of various nations might not tell you which nation’s people are better off.

Answer 1

GDP is the Gross Domestic Product. GDP is the final value of all goods and services produced within the geographical boundary of a country for a siecific time period. GDP is generally calculated in a yearly basis.

In case of nominal GDP the final value of goods and services is considered using the current year prices.

However, in case of Real GDP, the GDP is calculated for a specific year taken into account the inflation rate also. Real GDP considers the purchasing power of an economy. Real GDP is calculated using the prices of a selected base year. To calculate the real GDP, one must need to kNow how much GDP had been changed due to inflation.

GDP gives us the quantitative values of a country's economy, but we do not get to know the qualitative aspect of it. We do not know if the children's education is taking place properly, or child mortality rate had decreased or if life expectancy has increased or not. So, GdPs not always say if a country is better off or not.

Moreover, GDP is the total income of a country, now Iif a country is small with a small nber of people, it's GDP will be low than a big country with high population and high GDP. It might happen that the people of the small country will be better off than that of the big country, as the per capita income of the small country might be more than that of the big country.

GDP captures the total production which has taken place in a given time period. When Tsunami struck, after that the GDP increased for some of the South East Asian countries because the countries were reconstructed after Tsunsmi, hence, investments were taking place, but again the life qualities of the people might not have been good. GDP does not capture the life expectancy, adult literacy, infant mortality, descent standard of living of all well beings. So, the GDP does not tells us if a country is better off. In GDP each component is given the weight of its relative price. It works because price reflects both the marginal cost of the producers and the marginal utility if the consumers. But the output of the welfare of the government services such as public education and healthcare which have no market prices are difficult to neasmea despite it's importance in the economy.