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In: Economics

Does GDP focus on the welfare of domestic residents? Please explain. Why is real GDP an...

Does GDP focus on the welfare of domestic residents? Please explain. Why is real GDP an economic indicator that is closely monitored? Do you believe there is a political lag factor and/or wait and see lag factor in the collection of data used to calculate our country’s economic well-being? Please provide a real-life example in your response.

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Expert Solution

GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year. GDP growth rate is an important indicator of the economic performance of a country.GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted). GDP is an indicator and you might want to compare it to a thermometer. The thermometer tells you temperature and does not has any influence on the fluctuations of temperature by either increasing or decreasing it. So yes GDP is directed towards the domestic economy and can be used for welfare but it does not do any welfare by itself.

Economists use the real gross domestic product (GDP) when they want to monitor the growth of output in an economy. Nominal GDP typically referred to as just GDP, uses the quantities and prices in a given time period to track the total value produced in an economy over a certain time. Conversely, real GDP tracks the total value produced using constant prices, isolating the effect of price changes. As a result, real GDP is an accurate gauge of changes in the output level of an economy.

Calculating GDP for a nation that has a population of 325 million (2017) and houses millions of businesses is complicated. It takes time to collect and estimate the roughly 1,500 economic data points that are used to generate GDP each quarter. The BEA describes the process:

“ The source data include a variety of economic measures, such as sales or receipts, wages and salaries, unit sales, housing stock, insurance premiums, expenses, interest rates, mortgage debt, and tax collections. For most components, the source data are “value data”; that is, they encompass both the quality and price data required for current-dollar estimates.”

Due to the inherent complexity of the collection of data and some of the data points needed for collection have inherent latency associated to it such as labour wage data which is at least 2 months old at any given point of time.

One of the examples of a data metric would be price index. When the price of petrol tripled in the mid-1970s, demand was initially very price inelastic. People with petrol cars still needed to get to work. However, over time, consumers and producers respond to this change in price by developing more fuel-efficient cars or even buying an electric car. Over-time, demand has become more price elastic for petrol.

Please leave a feedback if you like the answer. It will provide us encouragement to even get better and the encouragement means a lot. Thanks for your question. It was a pleasure working on drafting the answer to this very involved question.


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