The welfare of a nation can scarcely be inferred from a measurement of national income" The total market value of all final goods and services produced in a country in a given year,
What is GDP?
Firstly, let's define GDP. GDP refers to Gross domestic product, which is defined as "market value of all final goods and services produced within a country in a given time period". Although it mentions " in a given time period" , So basically it is a measure of a country's income and its expenditure.
PS: Usually when you see a GDP value, it's mostly referring to the annual GDP of a country unless it is specifically specified.
Components of GDP
There are various goods and services produced in a country, what are things that are accounted and which are not?
-Consumer spending: spending by households on goods & services;
-Investment or Business Spending - spending on capital equipment, inventories & buildings
-Government Purchases:- Spending on goods & services by all levels of government
-Net exports - Spending on domestic goods by foreigners minus spending on foreign goods by domestic residents.
Exclusions: ( items that does not count as GDP)
1.Used Good
2.Cash Transfer
3.Financial transaction
4.Intermediate good
5. Non-domestic transaction
6. Non market transaction
7. Illegal or unreported transaction
Based on the definitions and the criteria that makes up a country's GDP, we can see the following flaws that supports Simon Kuznitz argument.
The account is based on market value - we know that market value is where demand meets supply. However, if we were to calculate the actual prices and quantity for the over all market in a more accurate manner, we have to investigate the demand and supply curve of each of the products that is in the market and determine the GDP from there. Therefore the usage of market price can merely be an estimate of a nation's income.
Statistics can be misleading- the article has mentioned that statistics such as unemployment rates with comparison to the past. If a country did not improve dramatically from last year (which affects the change in GDP) , does that mean that they have a bad economy? I am sure all of you know the answer is that, no, because they’re not starting from the same base, some countries like US who is at the top for GDP already has a very good economy compared to the rest of the world, therefore it make sense that improving economic situations that is already at the top is extremely difficult.
Data inaccuracy –This reason is more general, as we have billions of people in the world in makes it very difficult to survey everyone and to keep track of economic actitivty that accounts for the value in GDP.
Quality of life- it does not address this issue, people have always imagined that if people had a high GDP value, it means that they have a better quality of life. Firstly, GDP does not mean that most people are rich in the country. There may be an extremely imbalance between two. Secondly, because it’s numbered based on goods and serives only, it does not account safety, stress and other aesthetic aspects of life.
So these are only Some of the limitations of GDP only. There are some more. But I personally think that these are enough to explain the question for now.
What is GDP?
Firstly, let's define GDP. GDP refers to Gross domestic product, which is defined as "market value of all final goods and services produced within a country in a given time period". Although it mentions " in a given time period" , So basically it is a measure of a country's income and its expenditure.
PS: Usually when you see a GDP value, it's mostly referring to the annual GDP of a country unless it is specifically specified.
Components of GDP
There are various goods and services produced in a country, what are things that are accounted and which are not?
-Consumer spending: spending by households on goods & services;
-Investment or Business Spending - spending on capital equipment, inventories & buildings
-Government Purchases:- Spending on goods & services by all levels of government
-Net exports - Spending on domestic goods by foreigners minus spending on foreign goods by domestic residents.
Exclusions: ( items that does not count as GDP)
1.Used Good
2.Cash Transfer
3.Financial transaction
4.Intermediate good
5. Non-domestic transaction
6. Non market transaction
7. Illegal or unreported transaction
Based on the definitions and the criteria that makes up a country's GDP, we can see the following flaws that supports Simon Kuznitz argument.
The account is based on market value - we know that market value is where demand meets supply. However, if we were to calculate the actual prices and quantity for the over all market in a more accurate manner, we have to investigate the demand and supply curve of each of the products that is in the market and determine the GDP from there. Therefore the usage of market price can merely be an estimate of a nation's income.
Statistics can be misleading- the article has mentioned that statistics such as unemployment rates with comparison to the past. If a country did not improve dramatically from last year (which affects the change in GDP) , does that mean that they have a bad economy? I am sure all of you know the answer is that, no, because they’re not starting from the same base, some countries like US who is at the top for GDP already has a very good economy compared to the rest of the world, therefore it make sense that improving economic situations that is already at the top is extremely difficult.
Data inaccuracy –This reason is more general, as we have billions of people in the world in makes it very difficult to survey everyone and to keep track of economic actitivty that accounts for the value in GDP.
Quality of life- it does not address this issue, people have always imagined that if people had a high GDP value, it means that they have a better quality of life. Firstly, GDP does not mean that most people are rich in the country. There may be an extremely imbalance between two. Secondly, because it’s numbered based on goods and serives only, it does not account safety, stress and other aesthetic aspects of life.
So these are only Some of the limitations of GDP only. There are some more. But I personally think that these are enough to explain the question for now.
Why do countries use GDP?
Well, the article has suggested that these indicators can be utilized to compare competitiveness. Which is quite true. If there's no indicator such as like GDP, you wouldn't know how should you improve and what to decide as your countries' policy for the next year. Perhaps countries that are poor can learn from countries like USA whom has the highest GDP in econ