Question

1. Carefully define GDP. How is GDP used to measure the economy’s performance? What flaws and/or pitfalls are there in the measure?

Answer 1

Gross domestic product is the total monetary value of the finished goods and services produced in the economy (within country's borders) in a specific time period.

Textbook formula for GDP = C+I+G+(X-M)  

where C = consumption expenditure

I= investment expenditure

G= government expenditure

X-M = net exports

GDP is calculated by three methods namely the production method, expenditure method and income method.

Through these methods gdp serves as a measure of economy's health and size.

When current GDP is compared with the prior ones it tells weather the economy is expanding or contracting. It is also used as a measure to compare a nations Gdp with international GDPs . Government, policy makers and economists depend upon Gdp to make sound and informed policies to correct anomalies in the economy.

This method of GDP has certain drawbacks :

-Exclusion of non market transactions ( services of a housewife etc)

-failure to indicate weather growth is sustainable or not

- failure to account for income inequality

- failure to indicate negative externalities ( health of People due to pollution industries) etc.