Question

This Assignment deals with how a nation’s income is measured using Gross Domestic Product (GDP). You will determine the various components of the GDP, the difference between nominal and real GDP, and the limitations of the GDP as a measure of national income.

Answer 1

Nation income is the value of goods and services produced by domestic or international economy during a financial period measured in terms of money while gross domestic product is measured in measured as sum of values of produced in domestic economy.

National income = GDP + Wages / Salaries/ Income earned of residents earned from abroad.

Nominal GDP is calculated as sum of Consumption + Government Spending + Private Investment + Exports - Imports in an economy.

Nominal GDP is measured in terms of money while real GDP is measured in number of goods you can purchase. There comes a role of Inflation rate, when inflation rate rises, your purchasing power decline which is measured in real GDP. Thus, Nominal GDP = Real GDP + Inflation Rate

Limitation of GDP as a national income:

• Environmental Degradation: We tends to sum all values of goods produced in an economy while we do not subtract the loss caused to environment through these production. It shows inflation number of GDP.
• Non Salaried people: GDP does not include the value addition made by housewives or those products which people produce for themselves.
• Quality Change: As technology changes, products tends to be more advanced than before and offer better quality. It does not raise the price level which is in effect is not reflected in GDP as the utility gained by consumers by good quality products cannot be measured.