Write a 6 page essay on GDP.
Nominal GDP is the GDP according to current year prices while real GDP accounts for the effect of inflation on prices and is therefore also known as inflation adjusted GDP. By the use of a base year and elimination of effects due to price changes, real GDP allows useful comparisons to be made regarding the production of goods and services in an economy. For instance if the economy were growing at the rate of 4% per year while the rate of inflation was 1% then only 3% of the growth would be due to an increase in the economic output while 1% would be only due to price changes. GDP per capita describes the average number of goods and services consumed per person in a country.
The significance of GDP as an instrument for channeling of aid and investments into countries is highlighted by Canoy and Lerais in the research titled ‘Beyond GDP’ that was composed for the European Commission in which they say:
‘GDP is the best-recognized measure of economic performance in the world, often used as a generic indicator of well-being. GDP is used in a large variety of political and financial arenas. It serves as a criterion to decide who has access to funds at international organizations such as the EU, UN, IMF and World Bank, GDP plays an important part in the Stability and Growth Pact, and it is a lead indicator for forecasts of financial markets and banks, to mention just a few examples. It is also used for international comparison and rankings and plays a crucial role in political debates.’ (Canoy and Lerais, 2007)
The GDP of any given country fails to adequately explain its overall economic well being since its calculation either excludes or overstates a number of crucial aspects that describe the standard of living of a population. The notion of ‘well being’ has been described as a multidimensional concept ‘with both an individual interpretation in the Aristotelian spirit and a collective one to capture the progress of a nation’ (Canoy and Lerais, 2007). . Although GDP per capita i.e. goods and services consumed by the average person measures the spending by an individual yet it does not accurately depict an individuals’ well being. Materialistic expenditure is not all that characterizes individual well being. Rather it is a much more comprehensive idea including psychological well being as well as happiness derived from non material sources. An individual’s health, diet, achievements, mobility and participation in society are all essential sources of contentment that are not included in calculation of GDP.