Question

Q7 Economists have predicted that the outbreak of COVID-19 will lead to large decreases in the gross domestic product (GDP) of many countries. Discuss the pros and cons of using GDP to measure the impact of COVID-19 on economic activity.

Answer 1

Q7.

                                    Gross Domestic Product [GDP] of a nation represents the monetary value of finished goods and services produced in a nation in a particular period. The spread of Covid-19 caused serious problems to majority of the economies all around the world and thus the production levels of various economies have been reduced drastically due to the decline in the manufacturing trends and stalling of many manufacturing processes across the globe. With reductions in the international trade, many raw products required for manufacturing a produced are not reaching many destinations and thus causing the decline in the production levels of an economy. Thus, in this scenario, most of the nations’ economy are evaluated on the GDP levels and are found to be facing falling trends. The following are the advantages and disadvantages of using GDP as the sole indicator of an economic activity

Advantages of using GDP as an indicator

· As GDP gives the total production of finished goods, it represents the production capacity of the economy.

· Since the finished goods only are taken in to consideration in calculating the GDP levels, it indicated the export potential of the nation.

· It is an indicator of the buying power of a nation over a given time period.

· It is an indicator of the overall standard of living. An improvement in the GDP of a nation indicates a better standard of living of the people and vice versa

· Increased GDP levels indicated increased manufacturing potential of a nation which is an indicator of the industrial expansion that a nation has attained and vice versa

· Increased GDP levels indicates lesser dependence for imports and thus indicates a stable economy and vice versa. Thus, it indicates the stability of the economy also

Disadvantages of using GDP as an indicator

· GDP doesn’t take in to consideration the amount of unfinished goods in the country. This indicates that even goods that are in the final stage of production doesn’t get counted for GDP analysis. This is disadvantageous especially during similar crisis situations when the production potential is stalled.

· The unpaid volunteer works are not taken in to consideration. As much of the economic activity within a nation occurs in terms of volunteering works, not considering such works would mean that much of the economic activity of a nation are not considered

· The quality of goods produced in an economy is not considered in GDP calculations. This would mean that even though many products are manufactured, the reduction in the quality levels would have detrimental effects on the export potential and the domestic consumption of the nation and thus would be misinterpreting the economic condition of a nation.

                                   As discussed above, the measure of GDP is considered as the economic potential of majority of the nations across the globe. But there are many other factors that govern an economy and thus all those factors should be considered in making interpretations of an economy. The introduction of concepts like Gross National Happiness [GNH] as done in Bhutan may be a good step in this regard.