Write a 2-3 page essay outlining why GDP might not be a good measure of economic growth and suggesting some methods of improving the measurement of economic growth in the US economy. Incorporate material from the text, from outside sources and from personal experience in your analysis.
Gross Domestic Product (GDP) is a measure of the value of all final goods and services produced within the borders of a nation within a specified time period; usually one year. The GDP of a nation is equal to its aggregate expenditure and also equals its aggregate income. There are two approaches to calculating a country’s GDP. There is an expenditure approach which sums the total spending on final goods and services and there is the income approach. These two approaches are used throughout the whole world, however they are not 100% reliable because they do not take a series of other factors into consideration.
The expenditure approach measures GDP as a sum of consumer spending(C), investment (I), government expenditures(G) and net exports (X-M) in order to calculate the GDP of a country. The formula is as follows: Y = C + I +G + (X – M).
The income approach measures GDP by summing all the incomes paid by firms to households for use of the factors of production they hire – wages for labor, interest for capital, rent for land and profit for entrepreneurship. Once these three categories have been summed up a fourth and final one is added: Indirect taxes less subsidies. The addition of these four categories will add up to equal the GDP.
The above explained measures of GDP are only reliable to a certain extent because they do not take inflation or some aspects of economic growth into consideration. Economic growth occurs in many ways and some of these ways are not included in either of the two approaches of measuring GDP.
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