'Advantages and Disadvantages of Real Gdp\r'

'London School of work Belgrade\r\nA Critical Analysis Of literal gross domestic product Subject: Managerial frugalsMentor:Student: genus Maia Paunovic\r\nMirko Laz arvic Belgrade 2013 TABLE OF CONTENTS1. EXECUTIVE SUMMARY3 INTRODUCTION2. ADVANTAGES OF reliable gross domestic product43. LIMITATIONS AND SHORTCOMINGS OF REAL gross domestic product4 3. 1 RENEWABLE FINITE RESOURCE5 3. 2 out of date AND CHILD CARE5 3. 3 UNDERGROUND ECONOMY5 3. 4 UNEMPLOYMENT6 3. 5 THE INFLATION RATE6 3. 6 POLUTTION7 3. 7 LEISURE7 3. 8 POPULATION7 3. 9 INEQUALITY OF WEALTH7 4. CONCLUSION8 REFERENCES9 1. Executive messagemaryThe gross domestic forefinger (gross domestic product) is unitary of the main index numbers expenditured to m the wellness of a soil’s prudence. gross domestic product re indicates the put up together of all goods produces over a specific terminus of time or in a nonher(prenominal) wrangling it is the size of the economy. Usually, gross domestic product is co mp atomic number 18d to the previous quarter or year. As an ex adenosine monophosphatele, if a yearly mensuratement was interpreted and the gross domestic product went up 3%, this means that the economy has agen by 3% over the ultimately year. Measuring gross domestic product stack be complicated, the computation send word be done in one of three offices: the product method, the income method and the disbursement method.The first method of measuring gross domestic product is to sum up the cling to of all goods and services produced in the res publica. Basically, we focus on firms and add up all their performance. This method is known as the product method. The sulphur approach is the income method which is focused on the incomes generated from the action of goods and services. When we look back, we will see that this is the same as the sum of all values added at apiece stage of production. The added value is basically the difference amidst a firm’s income from s ales and the monetary value of its purchases from other firms.The difference is made up of compensation and salaries, rent, inte stay on and profit. Basically, it consists of the incomes produced by those involved in the production process. The utmost approach to calculating GDP is to add up all expenditure on last(a) issue. Which includes the following: consumer expenditure, government expenditure, investment expenditure, exports of goods and services and imports of goods and services. This final method is called the expenditure method. 1 Introduction Economic production and ontogenesis, what GDP represents, has a huge feign on nearly e realone within that economy.In order to break stilt the health of an economy or examine economic growth, it’s necessary to corroborate a way to streak the size of an economy. economic experts usually measure the size of an economy by the amount of stuff it produces. When GDP is calculated in relation to the population of a landed estate this is known as the average GDP per capita. This is often used as an indicator of a country’s metre of living. When calculating GDP international incomes atomic number 18 not included, even those pull in by domestic workers in other countries. However, as a measure of the metre of living in a country, GDP has its limitations and shortcomings. . Advantages of genuine GDP You give the sack use GDP to examine all economies of the world, from the regular army to Somalia. No matter if a country is steamed out search equipment or cars, all of its products countenance a certain monetary value, which added up gives a universally recognized measure. This measure is especially laboursaving if you consider how disparate economies around the world be in terms of the goods and services they produce, and the way they reinvest their income †stomach back debts or invest in intentness sectors. GDP is dynamic; it changes constantly based on new figures on productiv ity, consumption and investments.Therefore, economists and decision formrs can use GDP to measure an economy’s growth or decline. However, they can whole do that provided they shed an established and accurate mechanism to measure GDP value regularly; without that, they don’t have any data to compare whether present employment is worth more or little than in the past. By removing pomposity, strong GDP allows economists to make more accurate comparisons between countries and across quaternate years. Multinational corporations use real GDP when deciding where to send their investment dollars or headquarter their operations.\r\nNational governments use real GDP to set currency substitute rate targets and evaluate the effectiveness of economic constitution by comparability one year’s real GDP data against other years. exchange banks put significant weight on real GDP data when determining interest evaluate and other fiscal policy. Real GDP is in addition used to compute economic growth, known as the GDP growth rate. This is calculated by comparing each quarter to the previous one. If real GDP were not used, then you wouldn’t know whether it was real growth, or just expense and wage increases.The perfect GDP growth rate is between 2-3%. The GDP growth rate is critical for investors to adjust the summation location in their portfolios. Investors also compare countries’ GDP growth rates †countries with strong growth absorb more investors for their corporate stocks, bonds and even their own monarch exceptterfly debt.3. Limitations and shortcoming of real GDP GDP per capita is not a direct increase of living standards and tincture of deportment in a country, so policies aimed at maximizing GDP may be seen as ill conceived. This is due to many an(prenominal) reasons, including;3.1 Renewable impermanent resource: Most of country may grow rapidly by exploiting their non- reincarnateable finite resources such as oil and forests. They may also over- exploit resources which renew slowly, such as fish and wildlife. While on-going living standards may be high, those of future generations may be jeopardized. Therefore, GDP is unable to act as an indicator of future welfare. For example; the fishing industry in Europe is receivedly facing many problems as a result of over fishing in the past. This has had a significant impact on the GDP of European countries.GDP measures the total value of output produced, provided it cannot distinguish between the effects of different types of output on living standards. For example; two countries have the same GDP per capita, but country A has a well-funded education and health system, whereas country B has a well-equipped army. It is obvious that country A will have higher living standards than country B, but this is not apparent from their GDP figures.3. 2 Old and Child Care: If you charge for your parents when theyre experienced and enfeebled, it do esnt digest to GDP, but if you pay roughlyone else to care for them, it does contribute.The same goes for childcare and mental illness. The act of pity for the permanently sick, however compassionate that may be, is a use of resources for no tangible gain. Therefore, it does not contribute to GDP For these reasons, some people prefer to use other indicator to measure a countrys standard of living. These cordial indicators take non-economic factors into account, such as literacy rate, and life expectancy. several(prenominal) examples are the physical quality of life world power (PQLI), the Human Development Index (HDI), and the Basic upbeat Index (BWI).3. 3 Underground economy: Oliver (2006) in his book ‘Macroeconomics states about the underground economy as follows: ‘Underground economy is the part of economic activity not measured in official statistics, each be grow the activity is illegal, or because firms and workers would rather not explanation it to avoid paying taxes †is an old issue in Spain. (p 45) Black market: Michael & Charles (1993) describes that everybody wants to take favour of a carpenters, car mechanics, or painters, offer to do some work without a receipt.Agents engage in the black, or underground, economy for straight-forward reasons. First, they want to avoid taxes (the value added tax, employment and social security charges, profit taxes). another(prenominal) reason is that criminal activities, such as do drugs dealing, prostitution, or racketeering, are obviously get around unploughed underground. (p24) Different countries may have different sizes of light/ ‘black economy (e. g. crime, subsistence farming, drug dealer, and bartering and cash payments) and this is not interpreted into account by those who calculate GDP.GDP will then underestimate the actual value of output. For example; Russia has a very large black economy, so its comparatively smallish GDP is a poor indicator of actual income an d living standards. (Source: John Sloman, 2006, sixth ed,)3. 4 Unemployment: Oliver (2006) states that unemployment is the number of people who do not have job but are looking for one. It instantly effects on the welfare of the unemployed. Although unemployment benefits are greater today than they were during the great Depression, unemployment is still often associated with monetary and psychological deplorable. It is not the question how much pain depends on the nature of the unemployment. Real GDP is ill to measure unemployment of a country.3. 5 The Inflation assess: Oliver (2006) states that ‘Inflation is a sustained rise in the general take aim of prices in the economy-called the price take. The swelling rate is the rate at which the price level increases. (Conversely, deflation is a sustained decline in the price level. It corresponds to a negative inflation rate). If the price level increase nothing happened for the wealthinessy people but something happened for the poor people. As example, some Asian unpolished in that location GDP is high, price of goods is also high, and the rich people can easily procure the goods because thither income is high. But poor people which income is low they cant buy the goods. The real GDP mean per people per majuscule so real GDP cant measure the inflation rate which mean ideal of living.3. 6 taint: Environment is very important part of Standard of living. But this important part is polluted in many ways. Industry is produce lot of product. On the other hand, at the same time industry is throwing wastage or rubbish, smoke and useless chemicals.It is polluting environment by motor and vehicles which making sound and air contamination. temper change is a big factor for standard of living. Power station and chemical plant which cause global warm and for that reason why some countries like Maldives and south part of Bangladesh going down under water. Also High GDP per capita aptitude be accompanied by high levels of pollution and exploitation of the workforce, thus causing a step-down in living standards which is not reflected in GDP figures. Therefore, GDP may overestimate living standards in a country. Here real GDP cant measure Standard of living. (Source: John Sloman, 2006)3. 7 empty: Leisure is important for every age. By growing GDP people going to be like machineries. tribe are all time busy for their earning specie to build up their life. They dont have time for amusement like cinema, game; party also there is not enough leisure centers where people can go easily. When people not involved with entertainment to have proper leisure, it is not even mentionable whether the current GDP is high or low in the country. So, real GDP fails to measure the Standard of living.3. 8 Population: Population is a big impact of standard of living. Most of third world county has been suffering of this problem (Bangladesh, India, and Pakistan). If the population increase GDP semiau tomatic decrease as a result standard of living of county go down. Real GDP cannot reckon the countrymen problem.3. 9 Inequality wealth: GDP per capita is not an indicator of the distribution of wealth, because when GDP increases, this extra wealth may be received by only a small section of society with the rest of society even worse off. For example; the GDP of oil producing countries like Saudi Arabia is very high, but the wealth is only shared among a small minority of citizens, while the majority of citizens living congenator poverty. (John Sloman, 2006) GDP can only measure the natural standard of living, without taking into account the quality of life as perceived by each individual, which cannot be standardized across a population or countries. Let’s take the States and France for example.The regular army had a GDP per capita of USD 46, 900 in 2008 (http://www. indexmundi. om/united_states/gdp_per_capita_(ppp). html) while France had 45, 982 (http://www. indexmundi . com/france/gdp_per_capita_(ppp). html). not a big difference, France trails by a little. at one time let’s consider how well are people in each country †In the happy planet index, France ranks 71 while the USA ranks 114, just below Madagascar. People in France are much happier than people in the USA. They have better and free healthcare, free education and so on. overly these two countries Costa Rica has a GDP much lower than both (http://www. ndexmundi. com/costa_rica/gdp_per_capita_(ppp). html) but its people are considered to be the happiest in the world. Some countries, even though they have low GDP’s, its people are better off. Countries that one rarely hears of have very good life expectancies like in Andorra, caiman Islands, and so on. (http://www. happyplanetindex. org/data/).4. Conclusion GDP discusses how economists measure the total growth of a nation. At this lead it is important to know about how the GDP is doing in the change of standard life s tyle.It is already pretended that real GDP shows the total amount of growth in value in specific year. Economist can predict what to achieve and what is the difference in achievement by the end of the year. As we have seen that real GDP is countable by the value, it is low-cal to know for any people to predict what barely contribution needed in the country. But whatsoever the economist prediction is, the economic factors should be detain same. Without the economic factors stability, the total development of the country is not possible.References:1.John Sloman & Dean Garratt (2010), Essentials of Economics, 5th Edition, Prentice Hall. (Pages259-267)2. (John Sloman. 6th edn , 2006).3. Oliver Blanchard (2006), ‘Macroeconomics, 4th Edition, New Jersey: Prentice Hall.4. Michael Burda & Charles Nyplosz (1993), Introduction to Macroeconomics, 1st Edition. Oxford University Press.5. http://www. indexmundi. com/united_states/gdp_per_capita_(ppp). html6. http://www. indexmu ndi. com/france/gdp_per_capita_(ppp). html7. http://www. indexmundi. com/costa_rica/gdp_per_capita_(ppp). html 8. http://www. happyplanetindex. org/data/\r\n'