Question

• Why is GDP mentioned in business news so often and used as an important metric for our economy? Is this number accurate? What are the pros and cons of this measurement?

Answer 1

GDP refers to all the finished goods and services produced within a country during a specific period. It takes into consideration consumption expenditures, investment activities, government expenditure, and net exports.GDP is mentioned regularly on the news and is used as an important metric as it provides information on the production or size of the economy along with how the sectors are performing. It is seen as a universal measure of comparing the health of the economy. An increase in GDP is seen as a positive indicator of the economy's performance. For instance, the current pandemic has affected markets all over the globe, and according to the CBO report the COVID would reduce the US GDP by 15.7 trillion.

The advantages revolve around ease for policymakers to compare, analyze, and implement economic policy. It helps in comparing the performance across countries and is an indicator of the economic climate. It provides a summary of all the information with respect to C+I+G+NX.

GDP is not a good measure of economic welfare and output as it does not take into consideration the environmental sustainability, doesn't adjust for leisure, distribution of goods, unpaid work of women and black markets like drug sales, gambling, or prostitution. The transactions and income from such activities are not reported hence giving less accurate numbers or underestimating the GDP. This GDP is induced for government policies but if the result is not accurate it can negatively affect the economy.