Evaluate the use of GDP figures as a mean of comparing countries

INTRODUCTION

Gross Domestic Product (GDP) is one of the measures of national output in a given country’s economy. Basically, it is defined as the total cost of all finished goods and services produced within the country in a period of one year. There are three methods of measuring GDP: national expenditure (the value of spending by households on goods and services), national income (the value of income paid by firms to households in return for land, labour and capital) and the most common method - national output (the value of the flow of goods and services from firms to households).

GDP figures are the most common tools to compare countries, because they  take into account consumption, investment, government spending, exports and imports within a country. They compare countries by measuring the size of the economies and the flows of money. However, GDP does not consider all features of the economy such as composition of output, working conditions, externalities, nonmarketable services or happiness.

METHODS OF DATA COLLECTION

In an attempt to compare countries by GDP figures, there has to be one method of data collection. It is impossible to compare different GDP numbers when it is measured by different methods. For example, in 2007, International Monetary Fund (IMF), World Bank (WB) and CIA World Factbook (CIA WF) measured GDP of all countries in the world. Even though their countries ranks should have been the same, they differed substantially. According to IMF, Mexico was 13th country in the world by GDP with  $1,022,816 mln. In WB statistics Mexico was 14th ($893,364 mln) and in CIA WF it was 15th ($893,400 mln). When comparing countries, it has to be remembered to compare GDP figures from one source.

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Furthermore, GDP is usually measured in nominal value at market exchange rates or at purchasing power parity (PPP) rates. PPPs are currency conversion rates that take into account the differencies in price levels between countries. The more appropriate tool to compare GDP between countries is comparing at PPP rates, because nominal value of GDP at market exchange rates is shaped also by interest rates and capital flows. For example, the nominal GDP and GDP PPP statistics are completely different according to CIA WF data. India’s nominal GDP is 12th in the world ($1,099 bn), whilst its GDP PPP is ...

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