Gdp - How Is It Measured?

Describe how Gross Domestic Product (GDP) is calculated. Discuss how good a measure GDP is of a country’s economic well-being.

In this essay i will be exploring the calculation of GDP. The key factors of this measure are very important as they calculate the total output of a country’s spendings, I will further analyse how effective GDP really is within a country and what makes it unique as an individual measure. Unemployment and inflation will be explored as these factors effect the profit within companies which will then lead to changes in the country’s GDP both, per capita and generally. Although GDP is a good measure of the economic well-being, there are still shortcomings which influence it being a complete measure of the economy such as people’s standards of living not being taken into consideration. I will discuss other ways in which the economy is calculated such as the Gross national Product and compare the key differences whilst also considering how effective a combination of measures could be for a country’s economic well-being.

Gross Domestic Product (GDP) measures the total income including everyone in the economy and the total amount of money spent on goods and services in the economy. The formula that is used to calculate GDP is GDP = C + I + G + ( X - M ) (Truax, M. and Miller, R. (2010). The Evergreen Portfolio. p.23). GDP is an important measure of a country’s economy, the consumption consists of durable goods such as cars, washing machines and computers as they can be used many times. Non-durable goods and services are the opposite, for example milk which is immediately consumed. Investment is also included in the measure of GDP as it gathers the expenditures in the business inventories such as gross investment which keeps machinery updated, however replacement is not included as an increase in the output although the year that goods were produced is added to the nation’s economy to avoid an overlap of expenditure. Government covers the spendings on all final goods and services. Exports includes goods and services produced for other countries. Whereas Imports are goods that are brought in from other countries and are not included in the total GDP as they were not produced from the country.

GDP as a single measure is effective for a country’s well-being as it calculates all the goods and services produced within a country, whereas different forms of measures such as Gross National Product (GNP) “is the total income earned by a nation’s permanent residents” (Economics, Mankiw, N. and Taylor, M. 2011, p.442) and does not take into account what migrants earn. This shows that GDP is a more precise option to use when measuring the economic well-being of a country as it will also allow the government to accurately calculate how well the economy is doing in their country. Another measure of a country’s income is Gross National Income (GNI) in which also calculates the total income earned by a nation’s permanent residents and any product taxes which are not included in the output, this is similar to GNP. GDP shows a clear difference and measures income more equally than GNI as it includes anyone living within the borders of the UK. It focuses more on the expenditure of a country as a whole rather than calculating the total production of residents of a nation which could be living anywhere in the world. GNI and GDP could help to identify a country’s specific area of expenditure, by calculating the percentage of permanent and temporary resident’s spendings within a nation.