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

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Introduction

INTRODUCTION TO ECONOMICS - ESSAY IN MACROECONOMICS - HOW IS GDP MEASURED AND WHAT ARE ITS LIMITATIONS AS A MEASURE OF THE QUALITY OF LIFE? Word Count: 2066 "The current GDP of Brazil in 2002 was $497.4 billion" (World Bank). "An expectation of healthy consumer spending has led many economists to forecast a GDP growth rate of better than 4 percent this year (in the United States)" (CNN). What does this mean? What is GDP? Gross Domestic Product (GDP) is the value of aggregate production of goods and services in a country during a given time period, which is usually a year. It shows the level of the national income. How is GDP measured? Does GDP give a good indication of the quality of life? Are there any limitations to using GDP to measure the quality of life? All these questions will be answered by the end of this essay. GDP is measured in the UK using three different approaches. They are: * Expenditure Approach * Income Approach * Output Approach The sum of the values of the various components of aggregate expenditure is taken into account to arrive at the GDP using the Expenditure Approach. The components of aggregate expenditure are given by the following equation:- Aggregate Expenditure = C + I + G + (X ...read more.

Middle

Let us take the example of Nigeria, using Nepal as a comparison. The GDP level in Nigeria for example, in 1996 was $31,995. In Nepal in the same year, it was only $4,456. This would suggest that each and every resident of Nigeria had relatively more income than a resident in Nepal. However, this is not the case as indicated by the Gini co-efficients. The Gini co-efficient was 51 for Nigeria and 37 for Nepal in 1996. This shows that the income distribution in Nigeria is comparatively highly unequal. The benefits of high income are only enjoyed by a few which obviously means that the quality of life is not generally great for many. Residents of two countries could have the same income and therefore the same level of GDP. However, this does not mean that these countries have the same quality of life as countries have different price levels. When comparing the GDP of two countries, the value should be assessed in terms of a common currency, preferably dollars or euros. However, this can cause a problem. If for example, 50 Cyprus Pounds can be exchanged for $105, then as it is highly unlikely that 50 Cyprus Pounds can buy the same amount of goods in Cyprus that $105 can buy in the United States. ...read more.

Conclusion

As an environmental economist, Robert Repetoo, said, "a country can exhaust its mineral resources, cut down its forests, erode its soils...hunt its wildlife to extinction, but its GDP would not be affected". Economists have come up with many other measures to include GDP such as EDP, the environmentally adjusted domestic product which subtracts depreciation of natural capital and defensive expenditures from GDP. However, the same valuation problem arises once more. How can one give an accurate value to the depreciation of natural capital? The United Nation's Human Development Index (HDI) is another measure that takes into account life expectancy, adult literacy, schooling and PPP real GDP per capita. This includes many other factors that affect the quality of life. There are many others such as doctors per person, number of paved roads, amount of crime etc. However, a country which excels in all those features may not always have a high GDP. That cannot necessarily mean that the standard of living in that country is low. GDP measures the national output and should be considered in that perspective only. It is obvious that it is not the best and most reliable measure of the quality of life. All these measures allow economists to acquire a fuller picture of the economy and the welfare of the country. GDP is one extremely important instrument out of many used in the examination of the economy. ...read more.

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