GDP is the accurate measure of economy it shows how well or how bad the economy is doing.
True said, nothing is perfect in the world there are some shortcomings of GDP which are
important to consider in the country economy.
SHORTCOMINGS OF GDP
NON-MARKET TRANSACTIONS
GDP calculate the transactions occurs in the market place other than that its out of its
scope, non-market transaction are not occur in the market and no proof is available to make
it part of GDP. Suppose, a motor mechanic repair his own car by working whole day, people
do the job of gardening by themselves. These type of transaction never counted in the GDP,
only the transactions occurs in the market are considered in GDP.
LEISURE
In recent years, the working hours are reduced to great extent like in USA in few years
weekly working hours reduced from 56 to 36 in addition to this increase in sick leaves,
casual leaves, annual leaves, maternity and paternity leaves bring relief in people life. This
leisure surely improve the employees performance but unfortunately the leisure is not part
of GDP although its quite clear that people are working less and producing more output
which shows improvement in productivity and well being of peoples.
IMPROVED PRODUCT QUALITY
GDP is the quantitative measure of product and services rather than qualitative measure, it
fails to gauge the quality improvement in the product and services such as computer are
available on cheap prices than past but with more processing and storage. This
improvement make people happy and satisfied than before because they are getting more
on very nominal prices. The quality measure have a great impact on economic well being
but again GDP ignores quality attribute entirely.
THE UNDERGROUND ECONOMY
The other aspect of economy which exist in every country with higher percentage in a
hidden market. The underground economy is generated from illegal activities such as
gambling, smuggling, robbery, prostitution and other. The people involve these type of
business have a valid reason to not show their income to the government.
Most people in the underground economy are doing legal activities but choose not to report
their income to Government. The person receiving unemployment compensation benefits
may take an “off- the-books” or “cash-only job”. A person give tuition to neighbor kids on
behalf of free car repairing services for kids father.
Why GDP Matters
Policymakers, government officials, businesses, economists and the public alike rely
on GDP and related statistics to help assess the economy’s well-being and to make
informed decisions.
Policymakers will look to GDP when contemplating decisions on interest rates, tax
and trade policies.
The pace at which our economy is growing affects business conditions and
investment decisions, as well as whether workers can find jobs.
State and local governments rely on GDP and similar statistics to help shape
policy or decide how much public spending is affordable.
Economists study GDP and related statistics to help inform their research.
GDP enables policymakers and central banks to judge whether the economy is
contracting or expanding, whether it needs a boost or restraint, and if a threat such
as a recession or inflation looms on the horizon.
The national income and product accounts (NIPA), which form the basis for
measuring GDP, allow policymakers, economists and business to analyze the impact
of such variables as monetary and fiscal policy, economic shocks such as a spike in
oil price , as well as tax and spending plans, on the overall economy and on specific
components of it. Along with better-informed policies and institutions, national
accounts have contributed to a significant reduction in the severity of business cycles
since the end of World War II.
GDP (Gross Domestic Product) is an economic indicator which records the level of
goods and services produced within any given nation’s economy. It is one of the
most important economic indicators for a country, as it assists in recording the level
of output within their economy, along with, in part, acting as a benchmark for living
standards.
GDP Further Explained
Broadly defined, GDP refers to the final market value of all goods and services within
any given economy. GDP figures are usually released on a quarterly and yearly
basis. Put simply, GDP aims to record the level of production within an economy.
Additionally, acting as an indicator for the level of economic wellbeing within a
nation’s economy.
In measuring GDP, there are four components. These are:
Consumption (C): Consumption represents the value of all consumer spending within
an economy. An example of C would involve the purchase of any Australian
produced consumer item.
Investment (I): Investment expenditure represents the value of all the country’s
investment spending. An example of I could involve an Australian business
purchasing new capital equipment .
Government (G): Government expenditure refers to the value of the respective
governments spending, whilst not taking into account Welfare spending. An example
of G could be the value of Government Infrastructure Spending.
Net Exports (NX): Net Exports relates to the overall value of a respective nation’s
exports, whilst subtracting imports, which in isolation, acts as a burden on GDP. An
example of NX would be the value of all Australian Iron Ore exports to China.
GDP Growth Rate
When measuring the improvement in a nation’s GDP, the GDP Growth Rate is often
utilised. This involves comparing the current level of GDP to the preceding year, with
the percentage difference being the growth rate.
Typically, Australia’s Goal of Sustainable Economic Growth is between 3-4%, not too
high leading to inflationary pressures, nor not too low, leading to high unemployment
and other recessionary factors.
GDP Per Capita
As briefly mentioned before, GDP can also act as an indicator for the level of living
standards within a nation’s economy.
Through using the GDP Per Capita metric, it can act as more understandable
indicator of living standards. This involves dividing the overall level of GDP within
any given nation, by the population of that nation. Through this, it helps to indicate
the share of the ‘economic pie’ so to speak, within a nation.
For example, Australia’s GDP Per Capita in 2014 was $37,828.25.
Real vs Nominal GDP
There are several ways to measure GDP, with some being better indicators than
others. Firstly, Nominal GDP records the final market value of all goods and services
within an economy at constant rates, at current levels of inflation.
In contrast to Real GDP, which measures the final value of all goods and services
within an economy, however adjusted for inflation. This is done through basing the
prices of those goods and services within the GDP figure, by a base year .
Real GDP is usually considered the better indicator of economic growth, through its
particular focus on measuring production.
Whereas Nominal GDP may over-exaggerate the growth rate, if there is consistently
higher levels of inflation within an economy.
BLACK MONEY
What Is Black Money?
Black money is money earned through any illegal activity controlled by country regulations.
Black money proceeds are usually received in cash from underground economic activity
and, as such, are not taxed. Recipients of black money must hide it, spend it only in
the underground economy, or attempt to give it the appearance of legitimacy
through money laundering.
How Black Money Works
In its simplest form, black money is money on which tax is not paid to the government. A
store that accepts cash for its merchandise and does not issue receipts to its customers will
be transacting in black money, as it would not pay tax on the unaccounted sales.
Furthermore, a property buyer who purchases land valued at $200,000 from which $50,000
is reported on the books and $150,000 is paid under the table to the seller, will have
transacted in black money worth $150,000. The sellers in both examples have earned
money from legal sources but evaded taxes.
Examples of Laundering Black Money
Most black money holders attempt to convert the money into legal money, also known as
white money. This is typically done through money laundering, which can be attempted in a
number of ways. Consider a consumer who pays the sales tax on retail goods but does not
actually purchase the merchandise. If the consumer receives a sales receipt and is
reimbursed for the price of the goods, the reimbursement is considered black money. The
seller counters this effect by selling the merchandise to another customer, who purchases
the item but does not receive a receipt for the purchase.
The four components of gross domestic product are personal consumption, business
investment, government spending, and net exports. That tells you what a country is good at
producing. GDP is the country's total economic output for each year. It's equivalent to what
is being spent in that economy. The only exception is the shadow or black economy.
The formula to calculate the components of GDP is Y = C + I + G + NX. That stands for: GDP
= Consumption + Investment + Government + Net Exports, which are imports minus
exports. In 2018, U.S. GDP was 69% personal consumption, 18% business investment, 17%
government spending, and negative 5% net exports.
DETERMINANTS OF GDP
The three sides of GDP interact to determine the aggregate. An increase of effective demand
(consumption, investment, public expenditure, exports) will increase GDP, provided national
producers can meet the quality/price requirements of buyers. If not, imports will grow instead. If
national production cannot grow for physical reasons, firms producing already at full capacity
probably will decide to raise prices, vanishing effective demand with inflation.
The diffusion of technological and organizational innovation can impact on productivity, on
product/process quality and on costs (thus potentially on value added). Capital accumulation and
the increase of labour quality and motivation are important ingredients for a growing GDP.
Short term business cycles and long term trends can be - to a certain extent - traced back to the
individual growth path of heterogeneous firms, as this paper points out.
Impact on other variables
GDP can manifest manyfold interactions with its components, giving rise to positive and negative
loops. One of the most important is the link between consumption and income. Other feedback
loops are included in this interactive map.
Movements in GDP have a number of effects on specific markets. For instance, energy consumption
and greenhouse gases' emissions can be linked to it, unless proper strategies are undertaken.
Long-term trends
Never is GDP at the same level year after year. The most common GDP trend is a continuous growth
with periods of acceleration and deceleration. Some episodes of absolute fall are afterwards
overwhelmed by further growth. Decades can be quite different in terms of average rate of GDP
growth.
In many countries, especially small and in the Third World, growth is hectic and irregular, with
frequent and deep absolute falls and booms.
Wars are a distinctive source of GDP sinking. Oil crises have exerted recessionary pressure all over
the world (with the partial exception of oil producer countries).
On a global scale, the distance between the richest and the poorest countries is increasing, whereas
locally there exist "convergence clubs" in which distances are getting smaller. A few developing
countries have taken off and reached a high development stage.
