Advantages and Disadvantages of Real Gdp

London School of Commerce BelgradeA Critical Analysis Of Real gross domestic product Subject Managerial EconomicsMentor learner Maja PaunovicMirko Laz bevic Belgrade 2013 TABLE OF CONTENTS1. EXECUTIVE SUMMARY3 INTRODUCTION2. ADVANTAGES OF REAL gross domestic product43. LIMITATIONS AND SHORTCOMINGS OF REAL gross domestic product4 3. 1 RENEWABLE FINITE RESOURCE5 3. 2 OLD AND CHILD CARE5 3. 3 secret ECONOMY5 3. 4 UNEMPLOYMENT6 3. 5 THE INFLATION RATE6 3. 6 POLUTTION7 3. 7 LEISURE7 3. 8 POPULATION7 3. 9 INEQUALITY OF WEALTH7 4. CONCLUSION8 REFERENCES9 1. Executive labor unionmaryThe gross domestic indicator (gross domestic product) is one of the main indicators used to measure the health of a farmings sparing. gross domestic product re states the sum of all goods produces over a particularized period of snip or in new(prenominal) words it is the size of the rescue. Usually, gross domestic product is comp ared to the precedent quarter or year. As an ensample, if a yearly meas urement was contractn and the gross domestic product went up 3%, this typifys that the preservation has invoken by 3% over the last year. Measuring gross domestic product can be complicated, the calculation can be done in one of ternary ways the product method, the income method and the expenditure method.The first method of measuring rod gross domestic product is to sum up the judge of all goods and work produced in the untaught. Basically, we focus on firms and add up all their production. This method is cognise as the product method. The second approach is the income method which is focused on the incomes gene rankd from the production of goods and services. When we look back, we will see that this is the same as the sum of all encourages added at each stage of production. The added value is basically the difference between a firms income from sales and the equal of its purchases from another(prenominal) firms.The difference is made up of absorbs and salaries, ren t, interest and profit. Basically, it consists of the incomes produced by those involved in the production process. The final approach to calculating GDP is to add up all expenditure on final payoff. Which includes the adjacent consumer expenditure, government expenditure, investment expenditure, exports of goods and services and imports of goods and services. This final method is called the expenditure method. 1 Introduction Economic production and evolution, what GDP represents, has a huge b execrable on nearly e reallyone within that rescue.In order to analyze the health of an economy or examine sparing growth, its necessary to stick a way to measure the size of an economy. Economists usually measure the size of an economy by the amount of stuff it produces. When GDP is calculated in carnal knowledge to the community of a country this is known as the average GDP per capita. This is often used as an indicator of a countrys type of sustenance. When calculating GDP intern ational incomes are not included, withal those earned by domestic workers in other countries. However, as a measure of the standard of lifespan in a country, GDP has its limitations and shortcomings. . Advantages of received GDP You can use GDP to examine all economies of the world, from the the States to Somalia. No matter if a country is churning out seek equipment or cars, all of its products relieve oneself a certain monetary value, which added up gives a universally recognized measure. This measure is especially helpful if you flip over how assorted economies around the world are in terms of the goods and services they produce, and the way they reinvest their income pay back debts or invest in diligence sectors. GDP is dynamic it changes constantly based on new figures on productivity, consumption and investments.Therefore, economists and decision makers can use GDP to measure an economys growth or pass up. However, they can only do that provided they reach an establ ished and accurate mechanism to measure GDP value on a regular basis without that, they dont shed any data to compare whether present activity is worth more or less than in the past. By removing flash, hearty GDP allows economists to make more accurate comparisons between countries and across multiple years. Multinational corporations use real GDP when deciding where to transmit their investment dollars or headquarter their operations.National governments use real GDP to garb currency exchange rate targets and evaluate the effectiveness of economic insurance by canvas one years real GDP data against other years. Central banks put significant weight on real GDP data when determining interest rates and other fiscal policy. Real GDP is in like manner used to compute economic growth, known as the GDP growth rate. This is calculated by comparing each quarter to the previous one. If real GDP were not used, because you wouldnt know whether it was real growth, or just price and wag e increases.The ideal GDP growth rate is between 2-3%. The GDP growth rate is critical for investors to adjust the asset location in their portfolios. Investors besides compare countries GDP growth rates countries with strong growth retract more investors for their corporate stocks, bonds and even their own sovereign debt.3. Limitations and shortcoming of real GDP GDP per capita is not a direct increase of living standards and quality of life in a country, so policies aimed at increase GDP whitethorn be seen as ill conceived. This is due to galore(postnominal) a(prenominal) reasons, including3.1 Renewable finite resource most of country may grow rapidly by exploiting their non-renewable finite resources such as oil and forests. They may also over- exploit resources which renew slowly, such as fish and wildlife. age current living standards may be high, those of future generations may be jeopardized. Therefore, GDP is unable to act as an indicator of future welfare. For law suit the fishing industry in Europe is currently facing many problems as a result of over fishing in the past. This has had a significant impact on the GDP of European countries.GDP measures the total value of output produced, but it cannot distinguish between the do of different types of output on living standards. For example two countries have the same GDP per capita, but country A has a well-funded education and health system, whereas country B has a well-equipped army. It is obvious that country A will have higher living standards than country B, but this is not apparent from their GDP figures.3. 2 Old and Child Care If you care for your parents when theyre old and enfeebled, it doesnt give way to GDP, but if you pay approximatelyone else to care for them, it does contribute.The same goes for childcare and kind illness. The act of caring for the permanently sick, however compassionate that may be, is a use of resources for no tangible gain. Therefore, it does not contribute to GDP For these reasons, some peck prefer to use other indicator to measure a countrys standard of living. These social indicators take non-economic factors into count on, such as literacy rate, and life expectancy. Some examples are the physical quality of life index (PQLI), the Human Development indicant (HDI), and the Basic Well-being Index (BWI).3. 3 Underground economy Oliver (2006) in his book Macroeconomics states about the at a lower placeground economy as follows Underground economy is the part of economic activity not measured in official statistics, either because the activity is illegal, or because firms and workers would rather not report it to neutralise paying taxes is an old issue in Spain. (p 45) Black market Michael & Charles (1993) describes that everybody penurys to take advantage of a carpenters, car mechanics, or painters, offer to do some work without a receipt.Agents engage in the black, or underground, economy for straight-forward reasons. First, th ey want to avoid taxes (the value added tax, employment and social security charges, profit taxes). other reason is that criminal activities, such as drug dealing, prostitution, or racketeering, are obviously better kept underground. (p24) Different countries may have different sizes of informal/ black economy (e. g. crime, subsistence farming, drug dealer, and bartering and cash payments) and this is not taken into account by those who calculate GDP.GDP will therefore underestimate the actual value of output. For example Russia has a very large black economy, so its relatively downcast GDP is a poor indicator of actual income and living standards. (Source John Sloman, 2006, 6th ed,)3. 4 Unemployment Oliver (2006) states that unemployment is the number of pile who do not have job but are looking for one. It directly effects on the welfare of the unemployed. Although unemployment benefits are greater today than they were during the great Depression, unemployment is appease often associated with financial and psychological wo(e). It is not the question how much suffering depends on the nature of the unemployment. Real GDP is failure to measure unemployment of a country.3. 5 The Inflation Rate Oliver (2006) states that Inflation is a sustained hold up in the general level of prices in the economy-called the price level. The inflation rate is the rate at which the price level increases. (Conversely, deflation is a sustained decline in the price level. It corresponds to a negative inflation rate). If the price level increase nothing happened for the rich people but something happened for the poor people. As example, some Asian Country there GDP is high, price of goods is also high, and the rich people can easily buy the goods because there income is high. unless poor people which income is low they cant buy the goods. The real GDP mean per people per capital so real GDP cant measure the inflation rate which mean Standard of living.3. 6 Pollution Environment is very classical part of Standard of living. But this important part is bemire in many ways. Industry is produce lot of product. On the other hand, at the same time industry is throwing wastage or rubbish, smoke and unserviceable chemicals.It is polluting environment by motor and vehicles which making sound and air pollution. mood change is a big factor for standard of living. Power transport and chemical plant which cause global warm and for that reason wherefore some countries like Maldives and south part of Bangladesh going down under water. Also High GDP per capita might be accompanied by high levels of pollution and exploitation of the workforce, thus causing a lower in living standards which is not reflected in GDP figures. Therefore, GDP may overestimate living standards in a country. Here real GDP cant measure Standard of living. (Source John Sloman, 2006)3. 7 Leisure Leisure is important for every age. By growing GDP people going to be like machineries. People are a ll time busy for their earning coin to build up their life. They dont have time for entertainment like cinema, pole party also there is not enough leisure centers where people can go easily. When people not involved with recreation to have proper leisure, it is not even mentionable whether the current GDP is high or low in the country. So, real GDP fails to measure the Standard of living.3. 8 Population Population is a big impact of standard of living. Most of third world county has been suffering of this problem (Bangladesh, India, and Pakistan). If the population increase GDP automatic decrease as a result standard of living of county go down. Real GDP cannot solve the countrymen problem.3. 9 Inequality wealthiness GDP per capita is not an indicator of the distribution of wealth, because when GDP increases, this extra wealth may be received by only a small section of society with the rest of society even worse off. For example the GDP of oil producing countries like Saudi Arabi a is very high, but the wealth is only shared among a small minority of citizens, while the absolute majority of citizens living relative poverty. (John Sloman, 2006) GDP can only measure the genuine standard of living, without taking into account the quality of life as sensed by each individual, which cannot be standardized across a population or countries. Lets take USA and France for example.The USA had a GDP per capita of USD 46, 900 in 2008 (http//www. indexmundi. om/united_states/gdp_per_capita_(ppp). html) while France had 45, 982 (http//www. indexmundi. com/france/gdp_per_capita_(ppp). html). Not a big difference, France trails by a little. Now lets consider how well are people in each country In the happy orbiter index, France ranks 71 while the USA ranks 114, just below Madagascar. People in France are much happier than people in the USA. They have better and free people healthcare, free education and so on. Besides these two countries Costa Rica has a GDP much lower than both (http//www. ndexmundi. com/costa_rica/gdp_per_capita_(ppp). html) but its people are considered to be the happiest in the world. Some countries, even though they have low GDPs, its people are better off. Countries that one rarely hears of have very good life expectancies like in Andorra, Cayman Islands, and so on. (http//www. happyplanetindex. org/data/).4. Conclusion GDP discusses how economists measure the total growth of a nation. At this point it is important to know about how the GDP is doing in the change of standard life style.It is already assumed that real GDP shows the total amount of growth in value in specific year. Economist can predict what to achieve and what is the difference in exercise by the end of the year. As we have seen that real GDP is calculable by the value, it is easy to know for any people to predict what get along contribution needed in the country. But whatever the economist expectation is, the economic factors should be remain same. Witho ut the economic factors stability, the total development of the country is not possible.References1.John Sloman & Dean Garratt (2010), Essentials of Economics, 5th Edition, Prentice Hall. (Pages259-267)2. (John Sloman. 6th edn , 2006).3. Oliver Blanchard (2006), Macroeconomics, 4th Edition, unsanded Jersey Prentice Hall.4. Michael Burda & Charles Nyplosz (1993), Introduction to Macroeconomics, 1st Edition. Oxford University Press.5. http//www. indexmundi. com/united_states/gdp_per_capita_(ppp). html6. http//www. indexmundi. com/france/gdp_per_capita_(ppp). html7. http//www. indexmundi. com/costa_rica/gdp_per_capita_(ppp). html 8. http//www. happyplanetindex. org/data/