In: Economics
Briefly explain the components used to calculate GDP (be explicit, don't just put the letter; 5 points). Fully explain one method of measuring GDP (hint: use one of the components mentioned as an example; 8 points). Using evidence from the Real World Macro reading, discuss in detail two (2) problems with GDP measurements and explain how those problems impact the economy (6 points each 12 points).
The components used to calculate GDP are:
1. Investment- Investment in any form is included in GDP. Industrial sector, housing sector etc.
2. Personal Consumption Expenditure- It includes expenditure on substantial goods and non substantial goods.
3. Expenditure by Government- Expenditure by the government includes expenditure done by the state and central government.
4. Net exports- Net exports is the difference between Exports and imports of a country. Imports includes goods purchased by the domestic country from the foreign country whereas exports means goods purchased by foreign country from domestic country.
Method of measuring GDP:
Expenditure Method- Under this method, GDP is calculated by summing up all the expenditure incurred by different sectors of the economy.
1) Investment expenditure, government expenditure, consumption expenditure and net exports.
After summing up all of the above, depreciation and Net Indirect Tax ( Indirect tax - subsidies) are subtracted and Net Factor Income from Abroad are added. So the estimated value will show the Net National Product at factor cost.
In real world, the problem that occurs while calculating GDP is that it only measured data which are on organised market, it does not bother about the home production or illegal markets. In order to correct this, GDP must be calculated including home production of an individual and black markets must be checked regularly.
Another problem that arises is pollution costs are not considered while calculating GDP, so in order to correct it regulation of pollution must be there are if such costs are there, it must be adjusted with GDP.