Question

Chapter 12 discusses the basic measures of assessing macroeconomic performance and economic well-being. Which of the following do you feel is the best indicator of performance: Output (GDP) growth, Unemployment, Inflation, something else? Why? subject Economic

Answer 1

There are many indicators of macroeconomic performance. Out of which Real GDP or Economic Growth is the best one .

Gross Domestic Product or GDP is the sum total of all the final goods and services produced in a country during a particular period of time.

Real GDP

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices,

• Economic growth will always be a very important measure of economic activity.
• Real wages, labour productivity and investment are closely related as they affect real GDP and vice versa.

If there is positive economic growth, then national income is rising, and this should enable higher living standards. Economic growth usually helps other objectives, such as unemployment, government borrowing and real disposable incomes.

Usefulness of GDP

• GDP is widely used across the world. It does give a rough guide to the level of economic activity. A fall in GDP indicates recession and rising GDP indicates growth.
• GDP does give a useful guide to the economic cycle and is a useful indicator for monetary policy and fiscal policy.
• GDP is also measurable – it is objective. Well-being measures which involve surveys become highly subjective.
• Economic growth means a rise in real GDP; effectively this means a rise in national income, national output and total expenditure. Economic growth should enable a rise in living standards and greater consumption of goods and services.
• Higher GDP is an indicator of reduction in poverty. High GDP means that people can enjoy more goods and services . High GDP means that people have high standard of living.
• High GDP also indicates low unemployment as high demand will result in high production giving employment to large number of people.
• Higher economic growth leads to higher tax revenues (even with tax rates staying the same). With higher growth, incomes and profit, the government will receive more income tax, corporation tax and expenditure taxes. The government can then spend more on public services.
• High GDP indicates reduced debt to GDP ratio which is an important indicator.

However there is other side of coin. There are certain limitations of GDP.

• High Economic Growth or GDP also indicates inequality.There is unequal distribution of income.Rich are becoming richer and poor becoming poorer.
• Economic growth or GDP can cause negative externalities such as pollution, higher crime rates and congestion which actually reduce living standards
• Economic Growth also results in damaging the environment as it has resulted in global warming and increased pollution.
• Economic Growth or GDP does not measure actual living standards. The quality of life and quality of happiness is not measured by economic growth.