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 ?

Answer 1

1. GDP is the monetary value of the final goods and services produced within a country (or a domestic region) over a specified period of time (which is usually 1 year). Higher GDP suggests higher production of goods and services in the country. This means that higher goods and services is being availed to the consumers who are in a position to buy them, thus signalling towards their standard of living conditions. Secondly, higher production also suggests that more people earn more income producing these goods, thus being able to improve their standard of living.

Moreover higher GDP could also mean that services such as health and education are also being purchased more, which contributes to the overall quality of life of an individual.

2. GDP might not be a very good indicator of standard of loving due to several reasons as given below:

1. A country with a high GDP might also be facing higher inequality due to unequal distribution of wealth. Thus a large population might be very poor and thus would have a very low standard of living. However, due to high wealth in the concentrated few might skew the GDP numbers, thus not accurately portraying the standard of living of majority of its population.
2. Certain goods such as vacations, leisure, or even better air quality and availability of clean water etc. contribute to the better standard of living. However their value and the cost of acquiring them is not calculated in the GDP, thus not providing an accurate picture.
3. Several services such as household work, volunteering services etc. doesn't get counted while calculating GDP even though they contribute to standard of living as well.

The three other indicators to supplement GDP are as follows:

1. Genuine Progress Indicator (GPI): Defined by a non-profit organisation based in northern California, the GPI also covers crime and family background which includes legal, medical expenses etc., household and volunteer work, income distribution to account for inequality and, lastly pollution. \
2. Human Development Index: This index devised by the United Nations, is a composite of three factors: life expectancy at birth, education measure which consists of school enrollment and adult literacy, and standard of living as measured by a purchasing power parity which is a variation of GDP per capita adjusted for price difference between countries.
3. Index of Social Health: developed by Marc Miringoff, the director of Fordham University Institute for Innovation in Social Policy, uses data available for 16 social indicators to create an index. These include a variety of indicators such as affordable housing, wages, teenage birth and drug use, drug and alcohol related abuse, unemployment, inequality etc.

3. Final goods are those goods which are either used for immediate consumption (or consumption of them as it is), or they are used in capital formation. Example: bread, chair, television etc. Final goods are used in calculation of the the GDP.

Intermediate goods are those good which are used as raw material for production of final goods. For example: flour, nails, sugarcane etc. Intermediate goods re not considered during the calculation of a country's GDP.