• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

How is GDP measured and what are its limitations as a measure of the quality of life?

Extracts from this document...


Gideon Krotosky Macroeconomics coursework Spring 2004 EC1001 Lecturer- John Heaman Tutorial - Peter Wilks BSc Economics and Accountancy Q. How is GDP measured and what are its limitations as a measure of the quality of life? A. Gross Domestic Product (GDP) can be defined as the annual value of output produced by factors of production within a nation's border. In other words, it is the sum of all incomes earned by the country's residents when producing goods and services with resources located inside that country. GDP is not to be confused with Gross National Product (GNP), which measures the flow of output produced with resources, which are owned by the nation wherever they might be located. The difference between GDP and GNP is net property income from abroad. The word "gross" in both of these measures of national income, indicates that no account has been taken of depreciation. There are 3 methods of calculating GDP: the product/output method, the income method and the expenditure method. In theory, because they all claim to measure the same aggregate, they should all give the same total. This is shown below in the circular flow of income: However, in practice, this is unlikely to be the case. This is because extremely large sums arising out of millions of transactions paid over different time periods are being dealt with and it would therefore be very unlikely if all 3 measures coincided. ...read more.


As a result of this, it is deducted. The main adjustments for the expenditure method include: * Taxes and subsidies - the expenditure total is adjusted to factor cost by deducting indirect taxes and adding subsidies. This is done in order to avoid a discrepancy between the income and expenditure totals. Indirect taxes raise total expenditure on goods and services relative to the amount received by the factor of production, and subsidies have the reverse effect. * Additions to stock and work in progress - these represent investment. The factors of production, which have produced this unsold output, will still have received factor payments. By ignoring additions to stock and work in progress, an imbalance between the 3 aggregates of output, income and expenditure would have been created; therefore, additions to stock and work in progress are treated as though firms have purchased them. Great interest is attached to measured values of GDP. Governments, investors and citizens gauge the success of their economies by how its GDP changes over time. Movements in the national income are often used to indicate changes in the quality of life but care must be taken in using figures for this purpose. It has many limitations: (1) Economic bads and externalities: some of the undesirable effects of economic growth may actually increase GDP. ...read more.


Highlighting internal disparities along these lines has raised national debate in many countries. In my opinion though, the HDI alone is not enough to measure accurately a country's level of development or its quality of life. This is because the concepts of human development and quality of life are much broader than what can be captured in the HDI. The HDI, for example, does not reflect political participation and regional or gender inequalities. HDI and the other composite indices only offer a broad proxy on the issues of human development, gender disparity, and human poverty. A fuller picture of a country's level of human development and its quality of life would in my opinion requires the analysis of the HDI in conjunction with a combination of other development indicators and information. In contrast to the use of HDI measuring living standards, GDP cannot be used to measure human development because of the HDI because it only reflects average national income. It tells nothing of how that income is distributed or how that income is spent - whether on universal health, education or military expenditure. Comparing rankings on GDP per capita and the HDI can reveal much about the results of national policy choices. For example, a country with a very high GDP per capita such as Kuwait, who has a relatively low level of education attainment, can have a lower HDI rank than, say, Uruguay, who has roughly half the GDP per capita of Kuwait. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. The Nature of Macroeconomics

    level of national output and employment AD needs to fall Pg 67 * Y1 = income and output is below full employment, insufficient aggregate expenditure in economy to maintain

  2. Retailing In India - A Government Policy Perspective

    FDI in Retailing "The sheer size and potential of India's consumer market is enough for the big international retailers to have an interest in setting up stores in the country, despite the obstacles they might face. The growth prospects of this sector seem to be very positive."

  1. Case Study: The Home Depot

    The large box stores will still remain the growth engine, but together with the smaller stores a larger success can be reached according to us. There were several conditions which have stimulated the growth of the home improvement industry. The first one is the economy.

  2. Chinese car market overview. Citroen case study

    international companies through 2000 was the 1996 Auto Industry Policy, which stated that car manufacturers must initially procure 40 percent of parts locally and then increase the localization of parts to 60 or 80 percent within a specified time frame.

  1. A Comparative Discussion of Different Approaches to Entrepreneurship.

    These researchers emphasize the anticipation of personal affective reaction of sociological entrepreneurship. There are also other scholars establish a psychological entrepreneurship model with five elements: intrinsic process motivation; instrumental motivation; external self concept-based motivation; internal self concept-based motivation; goal internalization.

  2. What are the limitations of GDP as an indicator of comparative living standards between ...

    will increase and will increase the output of the economy but the jams will decrease quality of life.

  1. Differences between the standards of living in Slovakia and The Hague

    tell us how many people do work and earn money and how many people don't. If there is a high unemployment in the country, people can earn more, spend more and the GDP is therefore increased. Shops will start doing better so the government doesn't have to support them as much.

  2. How is GDP measured and what are its limitations as a measure of the ...

    The Income Approach adds up all the income of households in the production of goods and services paid to households by firms. Totalling these incomes with the indirect taxes and the subtracting of the subsidies will give the final GDP calculation.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work