Normally a country’s Gross Domestic Product (GPD) is one of the ways used in measuring how to size the economy is. The simplest definition of the Gross Domestic Product of a country is that it is the market value of possibly all final products and services produced within a given specified period in that particular country. In economics, the term Gross Domestic Product (GDP) and Gross National Product (GNP) are sometimes used interchangeably but they refer to different things.
Gross Domestic Product (GDP) is effectively used in measuring the standard of living of individuals in a particular economy. The main advantage obtained when using the GDP IS that the GDP is measured frequently. For example, in the US the information on the country’s GDP is also produced every quarter. This provides the economists and even the nationals of the country with some hint to look and identify how the percapita trend is moving. In addition to this most countries use the GPD as a means of comparison in the living standards of different countries. The way most of these countries define and view GPD is almost the same therefore it can be used as a common measure when comprising the living standards of different countries.
However, the application of GDP as a measure of living standard is limited to some level. For example, a country may export its goods or products and in the long run, does not import anything may be found still to have poor living standards. The value of leisure can also be measured using the GDP when the production of goods and services is high. High levels of the country’s GDP show improved living standards of the people. When a living standard is improved, it means that happiness is also achieved.
The GDP of a country also measures the changes in the population. For example, the GDP level will be down if the country has many mouths to feed. A country’s population may increase but the population level from those in the workforce may remain constant. This means that more people should be employed since increasing the labor force will increase the output. A country whose population is high might experience low GDP. However, a population can comprise of those in self-employed sectors or jua kali sectors. These people might not be captured when calculating the GDP.
The improvement in the quality of products (goods) and services will automatically change people’s preferences and tastes (Gregory, 1982). A country’s economy will grow when the purchasing power of her people to buy high-quality products and this will, in turn, increase the GDP level. The production capacity of a country will increase when the members tend to improve the quality of the products. This, therefore, means that when the country’s GPD is high the same applies to the quality of the product. Nobody will buy goods of poor quality in the market.
However according to standard economic theory individuals do buy goods and services that for them have the biggest impact on their well beings, how much they want to consume and save, and the income they normally earn (Peter,2003). This, therefore, means that the GDP necessarily does not determine the quality of goods and services.
The GDP is also measured by the imports and exports of a country. When a country experiences a high level of GDP then it means that it exports a lot of goods and receives less or no imports. When a country survives on imports then the level of GDP will below. The differences in income-earning of different people also determine the level of GDP of a country. If a country has many unemployed people then the economy of the country will be down. The behavior of people will change and vary depending on the amount they earn. People with high income will have improved living standards as compared to those with low income.
Inflation is another factor that determines the economy of a given country. High inflation rates mean that the purchasing power of that county is therefore low. The power of the country’s currency is therefore low. When a country does not experience inflation people will change their behavior positively. Their behavior is most likely to change positively as they will have a lot of food to consume.
Non-market transactions also measure the GDP level of a country and the social welfare of individuals. Non-financial benefits individuals get from working also determines their welfare. For example, a good relationship with others in places of work will determine a person’s attitude to continue working or retire. But the problem is that those non-financial benefits are not easily measured though they increase the social welfare of people.(Michael,2001).
Even though the GDP is used by economists to measure the living standards of people and the general size of the economy, its use is limited. One of the limitations of using GDP is that it ignores work voluntarily done and unpaid. When working out with GDP a lot of calculations are confused. For example, in a cross-border comparison, the economists should ensure that a specific method is to be used. Criticisms have also been developed on how GDP measures the quality of life. Normally leisure and quality of life are measured by several factors (Gregory, 1982, p43). GDP is just one of them that measure that quality of life. Other indicators include political stability in that particular country. Just mere production of goods and services cannot tell whether a person is leading a happy life or not. One might have money but in the long run, may fail to be happy. Stress is another factor that might make one not feels unhappy.
GDP has also been inefficient in measuring the sustainability of growth. A country may decide to achieve a temporarily high GDP within a short period. It achieves this either through the exploitation of its natural resources whereby after this their level of GDP will go down.
For example, countries producing oil may sustain high GDP without industrializing and by the time the oil will be used up the high level will no longer be sustainable. The GDP does not capture the actual economic surplus that is found between the price paid and the subjective value received. Its inability to capture the difference may make it underestimate the aggregate utility. In occasions where net national wealth is used as a point of reference, the GDP may not measure this (Blejer,1997). The net national wealth is obtained after many accumulations of GDP for some time. Therefore I can conclude that even though the GDP is being used to measure the social welfare of people, in the real sense it does not due a lot of limitations it has.
Blejer, M. & Minassian, T. Macro economic Dimension. London: Routledge, 1997.
Michael, H. Public Sector Economic for Developing Countries. Barbados, UWIP, 2001.
Peter, J. M. Macro Economics in Emerging Markets. New York. Cambridge U.P, 2003.
Gregory, C. Evaluating the Reliability of Macro-Economic Models. London: Abe books, 1982.