8 Pages, Grade: 2
2. THE NOTION OF GROSS DOMESTIC PRODUCT
3. ISSUES WITH CROSS DOMESTIC PRODUCT
4. GROSS DOMESTIC PRODUCT AS A MEASURE OF WELL BEING
The business world offers numerous examples of corporations benefiting from competition, as they have to increase their productivity, economise their cost, and need to strive for innovations. It is generally agreed, that from a microeconomics’ view firms seek to win this competition, which can be determined by parameters such as revenue, profit, or customer satisfaction. Ancillary, competition does not only prevail between companies on a microeconomics level but also among country’s economies on a macroeconomic level. This competition received a lot of attention in recent years, which is also biased by the shift towards a more integrated and interdependent world economy that can be referred to as the term globalisation (Hill, 2011, p.24). However, it needs to be questioned, how to contrast the performance of one economy with the performance of another. How can we assess national income or output? The measure that is widely accepted and used is called gross domestic product (GDP) (Sloman and Wride, 2009, p.393). The purpose of this paper is to briefly outline what exactly incorporates in GDP and mainly to examine whether GDP is a good measure of economic activity and well being.
Dipietro and Anoruo (2006, p.698) identify GDP “as a measure of market output with the diverse output of the various goods and services produced during a given period aggregated into a single number using market valuation ”.
In approaching the calculation of the GDP it must be noted that there are three ways to work out GDP. However, by using the product method, the income method or the expenditure method the same numbers should be calculated (Sloman and Garrat, 2010, p.265). Nevertheless, when it comes to comparing GDP’s, it is significant to distinguish between nominal and real GDP. The nominal value measures the prices predominant at the time, not taking inflation into consideration. On the other hand, real GDP measures the prices that prevailed in some particular year. This year is considered as the base year. This figure does take account of inflation (Sloman and Garrat, 2010, p.260).
In other terms, GDP gives an idea of whether the economy is growing or shrinking. The Nobel Laureate Paul Samuelson expressed GDP as "truly among the great inventions of the 20th century, a beacon that helps policymakers steer the economy toward key economic objectives" (Samuelson cited in Lequiller, 2004, p.30).
The dilemma that arises by comparing GDP of different economies is that national GDP’s are measured in the local currency. This means, that in order to compare the values they have to be converted into a common currency at the current exchange rate (Sloman and Wride, 2009, p.395). In order to compensate the unequally purchasing power of the local currency, GDP can be transformed into a common currency at a purchasing-power parity (PPP) rate. The PPP is a rate of exchange “that would allow a given amount of money in one country to buy the same amount of goods in another country after exchanging it into the currency of the other country (Sloman and Wride, 2009, p.395).
Furthermore, it occurs that some goods and services remain unrecorded, which has the effect of an understated GDP. This ensue due to both the non-marketed items, that includes work which is rather carried out by an individual itself instead of employing someone to carrier out this task, and the underground economy, that consists of illegal and therefore undeclared transactions that can either be goods and services that are illegal due to their nature or transactions that are not declared for tax purposes (Fox, 2012; Parkin, Powell and Matthews, 2005, p.448). In a similar vein, the Stiglitz Commission found that, both committing certain types of crime and buying petrol can have the impact of a surge in GDP but will not increase welfare (Stiglitz, Sen and Fitoussi, 2009). As such, this report point out that alternative component of the National Accounts may be better measurements of economic improvement.
Title: GDP per head (UK) and life satisfaction
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Source: Eurobarometer, cited in Thomas and Evans, 2010, p.33
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