Question

Essay Question. Must begin with thesis. please identify all relevant concepts, terms and discuss critically all other positions against and aswell as in favor.

If you had to select just one indicator to measure the success or health of a country’s economy, what indicator would you select and why? Explain the advantages and limitations of the indicator you selected, contrasting it with at least two other economic indicators.

Answer 1

GROSS DOMESTIC PRODUCT(GDP)

The most comprehensive measure of overall economic performance is gross domestic product or GDP, which measures the "output" or total market value of goods and services produced in the domestic economy during a particular time period. GDP is probably the best measure of the overall condition of the economy because it includes the output of all sectors of the economy. It is common to use the quarterly real GDP series (nominal GDP adjusted to remove the effects of inflation) to determine the timing of business cycle expansions and recessions, although the National Bureau of Economic Research uses more timely monthly indicators to determine official business cycle dates.

The most common way to measure GDP is the expenditure approach. With the expenditure approach, GDP is the sum of the following elements:

• Total domestic consumption: This is the total amount spent on domestically produced final goods and services. Final goods are items that will not be resold or used in production within the next year — milk, cars, bow ties, and so on.
• Total domestic investment expenditures: This measurement includes not only investments in stocks and bonds, but also investments in equipment — such as bulldozers, computer servers, and commercial buildings — that will be useful over a long period of time. It also includes inventory goods — final goods waiting to be sold that a company still has on hand.
• Government expenditures: This includes everything from paying military salaries to building roads and maintaining monuments, but does not include welfare and social security payments.
• Net exports: Net exports is the total of goods and services produced domestically and sold to foreigners minus goods and services produced by foreigners but sold domestically (imports).

The important advantages of GDP are:

1.Easy to compare as the population of a country is taken into account

2.Gives a figure for every country

3.Gives good figures, so world leaders know where to spend money

4.Good indicator to show provision of services.

Limitations of GDP

There are a number of shortcomings to using GDP. Here are just a few:

• GDP doesn't count unpaid volunteer work: GDP doesn't take into account work that people do for free, from an afternoon spent picking up litter on the roadside to the millions of man-hours spent on free and open source software (such as Linux). In fact, volunteer work can actually lower GDP when volunteers do work that might otherwise have gone to a paid employee or contractor.
• Disasters can raise GDP: Wars require soldiers, oil spills require cleanup, and natural disasters require health workers, builders, and all manner of helping hands. Rebuilding after a disaster or war can greatly increase economic activity and boost GDP.
• GDP doesn't account for quality of goods: Consumers may buy cheap, low-quality, short-lived products repeatedly instead of buying more expensive, longer-lasting goods. Over time, consumers could spend more replacing cheap goods than they would have if they had bought higher-quality goods in the first place, and GDP would grow as a result of waste and inefficiency.

Although economists are constantly working on other ways to measure an economy, GDP is still the best indicator of a nation's overall economic health, in spite of its shortcomings.

Other Economic indicators are:

Purchasing Manager’s Index (PMI)

In the US, one of the most followed economic indicators is the Institute of Supply Management’s Purchasing Manager’s Index or PMI for short. The ISM’s PMI is a survey sent to businesses that span across all North American Industry Classification System (NAICS) categories to collect information on production levels, new orders, inventories, deliveries, backlog, and employment. The information collected can be used to forecast the overall business confidence within the economy and helps determine if it shows an expansionary or contractionary outlook.

One of the reasons why PMI is one of the most followed economic indicators is because of its strong correlation with GDP while being one of the first economic indicators to be released monthly. The component GDP that the PMI most closely relates to is the Investment component.

Consumer Purchasing Index (CPI)

While not directly related to the GDP, inflation is a key indicator for financial analysts because of its significant effect on company and asset performance. Inflation erodes the nominal value of an asset, which leads to a higher discount rate. Based on the fundamental principle of the Time Value of Money (TVM), it means that future cash flows are worth less in present terms.

To measure inflation, one of the most followed indicators is the Consumer Purchasing Index (CPI). The CPI measures the change of prices of a basket of goods, relative to a base year. The formula is as follows:

A basket is aggregated by the most consumed consumer goods or services. The price of the basket is then measured against the same basket in the base year. The CPI includes several variants.

Core CPI is the CPI excluding prices from energy and food-related products. It is because energy and commodity food markets experience high volatility in prices. Removing the two items provides a more stable measure of CPI.