Question

1. Define Gross Domestic Product (GDP) and discuss how it is used as a measure of living standard and the limitations of its use. 2. What other indicators (list at least 3) can be used to supplement GDP as a measure of welfare? 3. What is the difference between a final good and an intermediate good ? specify each

Answer 1

1. Gross Domestic Product can be defined as the market value of all the final goods and services produced within the boundary of country during a specified period usually a quarter of year. Since GDP measures the production of goods and services, the workers are paid wages which makes them able to pay for goods and services. This increases the standard of living. Standard of living does not include non-measurable parameters such as satisfaction, relationship etc.These are included in quality of life. Greater GDP means higher standard of living.

However, the use of GDP has certain limitations: 1. GDP includes production done by foreigners in home country and omits the production done by nationals in foreign country. Thus GNP shows better measurement of standard of living. 2. GDP doesnot include the unpaid work such as upbringing of children, caring of elders. 3. GDP does not include that part of agricultural produce which is kept aside for self use and not taken into account.
2. The other indicators are : 1. GNP or Gross National Product which is defined as the market value of all final goods and services produced by the nationals during the period under consideration. 2. Human development index which is based on life expectancy at birth, gross enrolment in education and adult literacy. 3. Gross national income which is based on purchasing power parity.

3. Final good is one which is ready to be consumed by final consumer whereas intermediate good is the one which is to be used for the production of final good or another intermediate good which in turn will produce final good. For example: car is a final good but tyres and steel are intermediate goods.