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What is "real" GDP? Explain the view that, other things being equal, a larger real GDP means greater social welfare. Under what circumstances might real GDP and social welfare change in opposite directions?

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Introduction

What is "real" GDP? Explain the view that, other things being equal, a larger real GDP means greater social welfare. Under what circumstances might real GDP and social welfare change in opposite directions? Word Count: 826 In hope to monitor changes in social welfare and well-being of the population, Macroeconomics officially measures a country's economic activity through real Gross Domestic Product, or real GDP.1 It is a common view that, ceteris paribus, a larger real GDP per capita reflects greater social welfare2, but due to unequal distribution of resources, social costs of production, poor accuracy of measurement and unofficial market transactions that real GDP per capita fails to take into account, there are obvious limitations to this assumption and its reliability as a welfare measure. Calculated as the sum of consumer spending, investment, government purchases, and net exports within a specific time period, GDP describes the size and growth of a country's economy.3 Thus, increases in price and quantity of goods produced leads to increases in GDP. ...read more.

Middle

There are limits to the above conjecture, as by definition, measures of real GDP exclude unofficial transactions or unpaid activities such as housework or leisure that increase welfare. These exclusions of non-market activities would under-record the level of GDP.8 As a result, a shift from non-market to market services would cause an increase in measured GDP due to the increase in the size of the market sector of the economy.9 Similarly, real GDP figures could understate true living standards due to the existence of the black market whose transaction are too difficult to measure and as a result, are not included in the measure of real GDP.10 Only taking into account material items such as income or ownership of consumer goods, another drawback of real GDP per capita is the possibility that market prices may not reflect social costs of production and thus may fail to measure other aspects of welfare such as quality of living. ...read more.

Conclusion

Divisive and distasteful for society15, this status gap is completely disregarded by real GDP per capita calculations and it thus causes the intrinsic welfare factor to be unreliable. Finally, there is no indication to the extent real GDP per capita may cause personal "happiness" or an individual's social welfare. It is impossible to measure that individual happiness or dissatisfaction based on having more or less goods, because material goods are not everything and because various aspects of life are important to different individuals. As a result, it is hard to state with certainty the definite impact of a larger real GDP per capita on individuals. Most statistics figures contain inherent flaws due to the manner in which they are compiled and due the fact that they are averages; the same principle holds true for real GDP. Despite, statisticians continue compiling data as it provides a rough indication of reality. Thus, despite real GDP's per capita many inaccuracies in reflecting economic and social welfare, its indication of the general state of the economy and links and comparison to the six macroeconomic aggregates may provide economists with useful indications of the economic situation. ...read more.

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