Advantages and Disadvantages of Real Gdp

London School of Commerce BelgradeA Critical Analysis Of touchable gross domestic product Subject Managerial economicalsMentorStudent Maja PaunovicMirko Laz arvic Belgrade 2013 TABLE OF CONTENTS1. EXECUTIVE SUMMARY3 INTRODUCTION2. ADVANTAGES OF authentic figure gross domestic product43. LIMITATIONS AND SHORTCOMINGS OF REAL gross domestic product4 3. 1 RENEWABLE FINITE RESOURCE5 3. 2 OLD AND CHILD CARE5 3. 3 UNDERGROUND 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 nitty-grittymaryThe gross domestic forefinger (gross domestic product) is atomic number 53 of the main indicators recitationd to vizor the health of a arenas preservation. gross domestic product represents the spirit of separately(prenominal) nigh(a)s produces over a specific period of time or in former(a) spoken language it is the size of the economy. Usually, gross domestic product is co mpared to the previous quarter or year. As an example, if a yearly measurement was interpreted and the GDP went up 3%, this means that the economy has grown by 3% over the stretch forth year. Measuring GDP foot be complicated, the calculation arsehole be done in one of three centerings the product method, the income method and the expenditure method.The first method of measuring GDP is to sum up the value of all goods and services produced in the country. Basically, we focus on firms and add up all their proceeds. This method is cutn as the product method. The second approach is the income method which is focused on the incomes generated from the merchandise of goods and services. When we look back, we will see that this is the same as the sum of all values added at each stage of production. The added value is basically the difference between a firms income from sales and the monetary value of its purchases from other firms.The difference is made up of wages and salaries, ren t, interest and profit. Basically, it consists of the incomes produced by those involved in the production process. The final exam approach to calculating GDP is to add up all expenditure on final output. Which includes the following 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 growth, what GDP represents, has a huge impact on nearly everyone within that economy.In order to dismantle the health of an economy or examine economic growth, its necessary to drive 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 relation to the population of a country this is known as the average GDP per capita. This is often used as an indicator of a countrys specimen of living. When calculating GDP international incomes are non included, even those earned by domestic workers in other countries. However, as a measure of the standard of living in a country, GDP has its limitations and shortcomings. . Advantages of real GDP You can use GDP to examine all economies of the world, from the USA to Somalia. No matter if a country is churned-up out fishing equipment or cars, all of its products devote a certain monetary value, which added up gives a universally recognized measure. This measure is especially helpful if you consider how opposite 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 assiduity sectors. GDP is dynamic it ad erectments constantly based on new figures on productivity, consumption and investments.Therefore, economists and decision makers can use GDP to measure an economys growth or decline. However, they can only do that provided they have an established and accurate mechanism to me asure GDP value regularly without that, they dont have any data to compare whether present activity is worth more or less(prenominal) than in the past. By removing inflation, real GDP allows economists to make more accurate comparisons between countries and across manifold years. Multinational corporations use real GDP when deciding where to send their investment dollars or headquarter their operations.National governments use real GDP to set currency ex stir rate targets and evaluate the effectiveness of economic policy by comparing one years real GDP data against other years. primal banks put significant weight on real GDP data when determining interest order and other fiscal policy. Real GDP is also 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 non used, then you wouldnt know whether it was real growth, or just price and wage additions.The noble-minded GDP growth rate is bet ween 2-3%. The GDP growth rate is critical for investors to adjust the addition location in their portfolios. Investors also compare countries GDP growth rates countries with strong growth curl up 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 maximizing GDP whitethorn be seen as ill conceived. This is due to umpteen a(prenominal) reasons, including3.1 Renewable bounded 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. While flow 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 example the fishing industry in Europe is currently facing ma ny 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 integrality value of output produced, but it cannot distinguish between the make 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 cope for your parents when theyre old and enfeebled, it doesnt contribute to GDP, but if you pay nearlyone else to care for them, it does contribute.The same goes for childcare and mental 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 passel prefer to use other indicator to measure a countrys standard of living. These social indicators take non-economic factors into account, such as literacy rate, and life expectancy. almost examples are the physical quality of life index (PQLI), the Human Development Index (HDI), and the Basic wellbeing Index (BWI).3. 3 Underground economy Oliver (2006) in his book Macroeconomics states about the netherground economy as follows Underground economy is the part of economic activity not measured in official statistics, any because the activity is illegal, or because firms and workers would rather not report it to avoid paying taxes is an old issue in Spain. (p 45) Black market Michael & Charles (1993) describes that everybody wants 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, they want to avoid taxes (the value added tax, consumption and social securit y charges, profit taxes). Another 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 in that respectfore lowball the actual value of output. For example Russia has a very large black economy, so its relatively midget 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 spate 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 still often associated with financial and psychological suffering. It is not the qu estion 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 rise in the world(a) 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. just now 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 stock(a) of living.3. 6 Pollution purlieu is very important part of Standard of living. But this important part is polluted 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 useless chemicals.It is polluting environment by motor and vehicles which making sound and air pollution. Climate change is a big factor for standard of living. Power station and chemical plant which cause spheric warm and for that reason why 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 ontogenesis of the workforce, thus causing a hang 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 all time busy for their earning money to physique up their life. They dont have time for entertainment like cinema, game 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 wealth 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 orderliness with the rest of society even worse off. For example the GDP of oil producing countries like Saudi Arabia is very high, but the wealth is only shared among a small minority of citizens, w hile the majority of citizens living relative poverty. (John Sloman, 2006) GDP can only measure the material standard of living, without taking into account the quality of life as perceived 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). hypertext markup language) 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 planet 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 forgive healthcare, free education and so on. Besides these two countries Costa Rica has a GDP much level 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 doing by the end of the year. As we have seen that real GDP is countable by the value, it is easy to know for any people to predict what further contribution needed in the country. But whatever the economist prediction is, the economic factors should be remain same. Without the economic factors stability, the total development of the country is not possi ble.References1.John Sloman & doyen Garratt (2010), Essentials of Economics, 5th Edition, Prentice Hall. (Pages259-267)2. (John Sloman. 6th edn , 2006).3. Oliver Blanchard (2006), Macroeconomics, 4th Edition, New 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/