Question

Alexander Tziamalis in 2018 wrote, “One of the first things economics students learn about is Gross Domestic Product (GDP). GDP is also a central concept in many political debates, including Brexit. Will it rise? Will it fall? What effect will this have on our lives? Gross Domestic Product measures the total value of goods produced and services provided in a country, calculating the net value added by each economic “actor”. So if you produce a car sold for £10,000 but you bought parts and materials worth £8,000, then your contribution to the GDP is £2,000. GDP assesses the size of an economy as well as the incomes it generates and the pace at which it grows (or shrinks) over time. A new book by economics journalist David Pilling suggests that in some developing countries GDP has become a national obsession – and with good reason. A nation’s GDP can invite foreign investment, or scare it away. Even in developed economies, a failure to boost GDP yearly can have negative economic and political repercussions. But despite its wide use, there are problems with attaching so much importance to GDP….”   Similarly, when it comes to GDP Robert Kennedy in 1968 remarked that it “measures everything in short, except that which makes life worthwhile.” Critically assess the claims by Tziamalis and Kennedy that suggests that placing much emphasis on GDP seems to equally harm human welfare and the world.                                                                      [22 marks]

Many Ghanaians anxiously, were waiting for the Ghana’s Monetary Policy Committee (MPC) to announce a new Prime rate base on the current economic situation. Last Wednesday, the MPC at a press conference said they have decided to maintain the Prime rate of 18% for the rest of the year. Explain how such an action is expected to affect money supply in the country, holding everything constant?                                      [8 marks]

Answer 1

The claims made by Tziamalis and Kennedy that implies that placing too much emphasis on GDP harms human welfare and the world is very true to a great extent. For example increase in GDP means increase in the output level in the economy. This means that increase in output is due to increase in production. Increase in production means more land is being used by the industry which often leads to higher levels of pollution and exploitation of natural resources. Thus the world is being harmed because of drastic impact on climate and human welfare is being impacted because increase in GDP doesn't necessarily mean that everyone is benefiting. It often correlates with higher levels of income inequality as seen in developed markets such as U.S and some parts of Europe. It also leads to higher expenditure on healthcare as greater levels of pollution leads to health specific problems. Thus when countries put too much emphasis on GDP, it often correlates with exploitation of natural resources and creating huge anomalies in terms of income distribution and wealth accumulation. Increased earnings lead to more than expected output generation and exploitation of labor force and natural resources. For example in many developed economies, people are not happy despite earning some of the highest salaries in the world, thus even though they are able to earn and generate huge amounts of output it doesn't necessarily mean that they are happy. It could instead mean that the cost of living is so high, that they are not able to save much and thus human welfare is not maximized. If a country constantly focuses on GDP, it would increase output at the cost of human satisfaction and make the world revolve itself around material benefits which are not the essence of life.

With the MPC maintaining the prime rate in times of economic distress. It essentially means that the money supply was expected to increase with a reduction in prime rate. But the money supply will instead fall as they have kept the prime rate steady and people will deposit more in the banks and spend less as the future is uncertain and the marginal propensity to save will increase whereas the marginal propensity to consume will fall, which will reduce the money supply all the more as people will hoard cash because consumer confidence has declined in light of the pandemic. People will borrow less as the interest rate is the same, which will also contribute to the fall in the money supply as investment would reduce because the borrowing rate has not declined and there will be less employment generation in the economy.