Topic 1: GDP and Its Limitations

1. What are the limitations of the GDP in measuring total output and national welfare?

First, the GDP is calculated at market price; therefore, it ignores externalities. A country experiences economic growth due to the use of renewable and nonrenewable resources. The exploitation of these resources increases negative externalities and reduces social welfare, but these effects are not included in GDP (Gwartney, Stroup, Sobel & Macpherson, 2013). Second, GDP does not account for productive non-market activities. The production of goods and services that do not involve money transactions is not included in GDP even though they exhibit value. Third, GDP ignores to measure the quality of life. The family, quality of health, wealth, education and satisfaction determines the individual’s state of well-being. GDP does not incorporate the quality of life in economic analysis.

1. What products (goods and services) are excluded from the GDP computation?

GDP excludes non-market products. In a free market economy, GDP does not include products that do not involve monetary exchange such as home cooking, serving, and babysitting. Second, GDP does not include intermediate goods. These are goods used in the production of other goods; therefore, GDP excludes their value (Gwartney, Stroup, Sobel & Macpherson, 2013). Third, GDP excludes illegal goods. Illegal trades or activities are excluded in computing GDP.

1. What are the impacts of the shortcomings of the GDP as a measure of the national product and national welfare?

GDP gives false information to other countries about the true economic picture of a nation particularly concerning the quality of investment. This boosts the confidence of people making them spend a lot of money since they believe that the economy is growing. For instance, nonmarket activities include transactions done outside the market. With the existence of such activities, consumers do not have reliable price information about them. Second, the GDP’s indicator that does not measure the true value; hence, distorting the overall picture of the economy. It does not provide an accurate reflection of the country’s economy.

Topic 2: Factors Determining Economic Growth

1.  What factors might contribute to a low growth rates in a country?

First, the use of outdated technology contributes to slow economic growth rate of a country. Technological deficiencies reduce the level of productivity while increasing the cost of output (Nijkamp, & Siedschlag, 2011). Second, low level of education and poor health contributes to slow economic growth. Inadequate educational opportunities and limited access to health care facilities hinder the economic growth of a nation. Third, political instability affects the economic growth. Instability in the government scare potential investors from investing in the country, and this slows down economic growth,

1. Compare growth rates across countries by visiting The World Bank website (http://data.worldbank.org/indicator). Why do some poor countries experience higher growth rates than developed countries such as the U.S.?

From the World Bank website, the U.S has GDP per capita growth of 1.6 while a poor country such as Cote d’Ivoire has GDP per capita growth of 5.8 (The World Bank, n.d.). Most developing nations have limited resources, and because of that, they tend to utilize them more efficiently compared to others (Nijkamp, & Siedschlag, 2011). This helps them to experience high growth rate compared to developed nations even if they experience the same challenge.

1. Why might growth rates of developed nations be lower than those of poorer countries?

The law of diminishing marginal productivity states that when we increase more capital, its marginal productivity will decrease. Developed nations use large capital in the production of goods and services; therefore, they experience a lower marginal productivity than poor countries. Developing nations are in the process of acquiring more capital and use established technology for production without spending resources on research. Therefore, their marginal productivity is higher, and this increases their growth rate.

References

Gwartney, J. D., Stroup, R. L., Sobel, R. S., & Macpherson, D. A. (2013). Macroeconomics: Private and public choice. Australia: South-Western Cengage Learning.

Nijkamp, P., & Siedschlag, I. (2011). Innovation, growth and competitiveness: Dynamic regions in the knowledge-based economy. Berlin: Springer.

The World Bank. (n.d.). Retrieved from http://data.worldbank.org/indicator

 
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