Question

In: Economics

A) What is Gross Domestic Product and what are its components? B) Based on the text...

A) What is Gross Domestic Product and what are its components? B) Based on the text and any additional sources you select, what are the limitations of GDP as a measure? C) What are some alternatives/additions to GDP as a measure of economic well-being?

Solutions

Expert Solution

A) What is Gross Domestic Product and what are its components?

The Gross domestic product (GDP) refers to the total number of output being produced in the boundary of an economy in a tax year. It is mainly used to calculate a nation’s wealth which describes an economy’s financial status. The main components of gross domestic products are personal consumption, investment, expenditure and net exports (export-import).

B) Based on the text and any additional sources you select, what are the limitations of GDP as a measure?

GDP has some limitations as it can’t be an accurate and complete measure of economic wealth as it does not include other components in the calculations. It is truly based on the productivity in an economy. GDP does not encounter several points while calculating nation’s wealth such as

  1. Leisure cost is not considered while calculating GDP which makes its inappropriate measurement on national income of an economy.
  2. Barter system transactions are not a part of GDP calculations.
  3. Pollution, global warming and other side effects are not included in GDP.

Other than these GDP does not include suicide rates, family breakdowns, poverty, health, infrastructure, income gap and cost of commuting to work and many more in its calculation for national income.

C) What are some alternatives/additions to GDP as a measure of economic well-being?

There are other measures available which can replace or can be better off than GDP. The other alternatives can be:

  1. GPI – Genuine progress indicator can replace GDP as it comprises and accounts for environmental issues, income distribution, family breakdown, criminal activities, resource depletion, and expense on defense activities, etc.
  2. UNHDI - United nations Human Development Index refers to a composite index which encounters life expectancy rate, per capita income and education indicator.
  3. FISH - Fordham Index of Social Health is an index which is based on sixteen indicators such as unemployment, drug abuse, housing, poverty, health insurances, highway deaths, income inequality etc.

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