Gross Domestic Product (gdp)

Gross Domestic Product (GDP)

“Gross domestic product (GDP) is the market value of all final goods and services produced within a country during a given time period- usually a year (Castles & Henderson, 2014).” Gross domestic product per capita is often used as an indicator of welfare in an economy. Other sources even refer to GDP as a measure of a county’s value of productivity (Castles & Henderson, 2014). GDP is calculated by adding a nation’s, total consumption (consumption goods, but not housing), investment, government purchases (military and infrastructure such as road and bridge construction, public services, etc.), and net exports (exports - imports). The following is an equation that is often used to determine GDP; Y = C + I + G + NX (Fleurbaey, 2009).

GDP is used to determine the total value of a country’s economic activities. The Word Bank, International Monetary Fund, and many other international financial institutions use the Gross domestic product per captain as a measure of the economic wellbeing of an economy (Castles & Henderson, 2014). However, Gross domestic product does have its own limitations, making it arguably not the best way matric there is in comparing two or more economies (Castles & Henderson, 2014). Some of the issues include the fact that nominal GDP does not consider the impact of inflation and deflation in economies (Kennedy, 2010). Secondly, the formula for Gross domestic product only considers formal economic activity, leaving out billion dollar transactions and spending that take place in the informal markets such as drug trade, prostitution, and unregistered businesses (Kennedy, 2010). More so, Gross domestic product only assumes that peoples’ preferences are relatively the same even in different geographical locations, which is not true. For instance, a country one country might have a high Gross domestic product simply because its citizens have a culture of spending on expensive brands, and another might have consumption value and GDP simply because its people prefer cheaper products (Fleurbaey, 2009). The formula does not consider these things simply because they cannot be measured with any accuracy, despite them being qualitative and quantitative activities of some economic value.

Although there appears to be a correlation between the Gross domestic product of an economy and its welfare, the relationship still is not as clean cut as all that (Fleurbaey, 2009). One might argue that the Gross domestic product index cannot equal social welfare because GDP is just but an average index which represent the amount goods and services sold, but does not investigate whether or not there is a correlation between the two (Fleurbaey, 2009). It is possible that an economy might produce an abundance of goods and services and still have poor welfare (Fleurbaey, 2009). For instance, China’s GDP per capita has been on the rise and yet the country as a whole is facing dire pollution and gender imbalance issues. Evidently, it is not necessarily true that wealthiest societies or individuals are always happy, and satisfied (Fleurbaey, 2009). If the GDP increases then the average welfare increases, but the average does not mean everyone has gained!

There is the need to adjust for different population sizes when comparing economic activities of countries using GDP (Castles & Henderson, 2014). It should also be noted that not all countries are capable of conducting and collecting accurate population census (Castles & Henderson, 2014). It is relatively easy for developed countries with more established processes to determine their population, consumption, and net exports than it is for developing countries (Kennedy, 2010). So comparing the Gross domestic product between developed countries and third world countries might not yield accurate results. More so, most international organizations convert figures into United States dollars ($US) (Castles &