Courtesy: Ahanaf Ahmed, Batch-201, Dept. of EEE, Green University of Bangladesh
Basically, GDP, or
gross domestic product, is the market value of the final goods and services
produced within a country in a given time period.
Usually, GDP
definition has four compulsory parts, they are Market value, final goods and
services, produced within a country, in a given time period. Among these, if
any point doesn't consider then the GDP calculation will be wrong. During
calculating GDP, we need to consider all of these points respectively.
Basically, GDP works as an indicator of economic growth of a country.
Brief
discussion is given below:
Basically,
GDP consists of consumer spending, investment expenditure, government spending,
and net exports hence it portrays an all-inclusive picture of an economy
because of which it provides an insight to investors which highlights the trend
of the economy by comparing GDP levels as an index. Usually, GDP is used as an
indicator for most governments and economic decision-makers for planning and
policy formulation. Another side, a negative GDP growth portrays bad signals for the economy. Economists’ analyze GDP to find out whether the economy is in recession, depression or upgrade. As
we know, GDP of a country can be calculated by considering two things;
expenditure approach & income approach. The expenditure measures the total
expenditure incurred by all entities on goods and services within the domestic
boundaries of a country. It also includes the measure of net exports. actually,
it is calculated by considering export and import in a country, if export is higher than import then we can say it means country has a positive balance of
payment. on the other hand, if export is less than import then it means country
has a negative balance of payment.
And, Income Method measures the total income
earned by the factors of production, that is, labor and capital within the
domestic boundaries of a country. The income approach measures GDP by summing
the incomes that firms pay households for the services of the factors of
production they hire—wages for labor, interest for capital, rent for land, and
profit for entrepreneurship.
Expenditure
approach and also income approach both are important for economic effects
cause, we know when income rise then expenditure increase gradually.
As
an example, we can say;
Let's
consider 'X' is a man whose salary was 10000, at that time he usually takes
tea, at a price of 10 taka, but after increasing his salary now he usually
avoids tea and now he takes coffee, at price 150 taka in the restaurant. And
tea is inferiors’ goods now for him. so, we have seen that when increasing
income at the same time expenditure also high as well as income. and this
process definitely increases the economic transection. This also indicates that
the economy is growing gradually. Basically, if a country maintains a GDP of 6
to 7 percent it is indicated that the country's economic growth is rapidly good
enough. Actually, GDP gives information about the size of the economy and how
an economy is performing.
From
Around a half-century, the most widely accepted measure of a country’s economic
progress has been determining its Gross Domestic Product (GDP). But GDP has
some limitation; It has a controversy of that, it measures income, but not
equality, it measures growth, but not destruction, and it ignores values like
social cohesion and the environment.
The
GDP does not adequately reflect the true health of a nation. Usually, Economic
growth is basically an accounting measure. It measures that how much money is changing
hands from one to another in the economy. Growth occurs when the value and
number of commercial transactions increase in the economy.
For
example; if my mother cooks food at home, the GDP doesn't increase. But if I
eat at a restaurant by payment, it increases the GDP.
Similarly,
if I teach my brother directly, GDP doesn't increase. But when I put my
brothers in a school(paid), then GDP must increase. So here I think it's not
satisfactory enough. Thus, it's only an account of the growth in the number of
commercial transactions in the economy. It's not a very good measure to
understand development of a society. GDP measures mainly
market transactions. It ignores social costs, environmental impacts, and income
inequality.
Needless
to say, that, there are many things that are important to our economic
well-being that doesn't measure in GDP because they're not monetized. for
example, when people provide care labor in their household, taking care of
children, taking care of elderly people, disabled people, that doesn't get
counted in GDP. The value of having a stable climate doesn't get counted in
GDP. Open-source information that people don't have to pay for every time they
use it doesn't get counted. So part of the problem is that there are things that
are really important to our economic well-being that GDP doesn't measure.
On
the other hand, another problem is there are things that counted in GDP that
actually don't enhance our welfare.
So,
all together we could say that GDP is an indicator of economic growth but it's
not a final solution to count out the actual economic situation of a country.
And
finally, I would like to say that if we need to know the actual situation of
economic growth, then we must also use other indicators with GDP. Then we can
know the actual economic situation of a country.
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