Custom «Concept and Measurement of GDP» Essay Paper Sample

Concept and Measurement of GDP

Gross Domestic Product (GDP) refers to the total market value of goods and services produced in a country over a period of one year. The GDP of a country reflects the economic performance of that country by its measure of the living standards of people (Duffy, 1993). It indicates the economic level of a country by finding the value of the total production and deducting the value of exports received. By finding out the level of the economy, a country is able to formulate policies, organise the utilisation of its resources and compare itself with other countries. GDP portrays a good measure of the national income of a country though it has some limitations. These include neglect of inflation effect and restriction on the geographical boundaries. Nevertheless, GDP is used as a gauge for a country’s economic stability and prosperity.

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The calculation of GDP is a very involving process with numerous substantive elements being considered. Important components of GDP include values of consumption, investment, government spending, exports and imports. Consumption entails the value of expenditure of households ranging from basic perishable to durable goods. The investments considered are the additions made to equipments, costs incurred in setting up new industries, acquisition of software and others assets. In relation to government spending, it refers to the value of government expenditure on finished goods and services. Exports and imports relate to the value of goods and services that a country sells to, and buys from other countries (Mankiw, 2008).

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The determination of GDP involves the calculation of its components and checking for its credibility to avoid double counting. After the components’ data is analysed, the value of consumption, investments and exports are summed together to determine a country’s output. In addition, the government spending and imports value is summed to get the total input. The final calculation of the GDP involves the deduction of the country’s input from its output. The difference will indicate the country’s surplus or deficit. The results obtained can be used to reveal the economic standing of a country.

The business cycle constitutes recurring expansion and contraction of the overall economic activity associated with the changes in employment, income, prices, sales, and profit. A business cycle consists of four phases. These are the peak, recession, trough and expansion. The peak refers to the maximum point of the economic growth when the country’s economy activity is at its optimum. Once the economy has reached the peak, it contracts and thus, results in a period of recession, which is a point when the economy performance is at its worst point (Sloman, 2009). The final phase is the recovery or expansion phase. This phase involves the picking up of economic activity and rapid growth. Although these phases are recurring, they occur on varying scales in the economy of a country. For example, the 2008 recession that affected U.S. had great impacts on other countries that depend on it for funding.

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Unemployment refers to a situation where an individual with relevant skills and knowledge does not have job despite his or her willingness to work. There exist numerous types of unemployment, which include structural, frictional and cyclical unemployment (Harvey, 2007). Structural unemployment refers to unemployment that occurs due to occupational and geographical immobility, and technological and structural change in an economy. Occupational immobility is the inability to acquire new skills necessary in the market and those that suits technological changes. The geographical immobility refers to the difficulty in the movement of people to different places to find market for their skills. With the change in technology, labour saving machines and equipments are invented, which leads to the decline in the demand for human labour resulting in unemployment. A structural change in the economy of a country leads to shortage of opportunities and most of the available skills are not utilised. For example, the reduction in the demand for coal makes its mining less viable leading to unemployment for the earlier miners.

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Frictional unemployment occurs when people moving from one employment opportunity to another become temporarily unemployed as they wait for better chances. At the same time, graduates from colleges encounter this form of unemployment as they wait for employment opportunities. For people with satisfactory benefits, they may be attracted to stay unemployed despite the availability of opportunities.

Cyclical unemployment is influence by trends that affect the economy or the performance of certain products and services. Employment opportunities that arise during certain periods or seasons cease when the season ends or declines causing unemployment. Additionally, unemployment may result due to the different phases of economic activity.

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Inflation entails the general rise and changes in the prices of goods and services. This leads to the decline in the value of a currency that can be used to buy goods and services. There exist numerous types of inflation depending on factors such as the time of occurrence, government reaction, rising prices, causes and expectation. The combination of these factors influences prices resulting in various forms of inflation such as such as creeping, moderate, galloping and hyperinflation. Some forms of inflation like moderate and creeping inflation contribution to the economy. However, galloping and hyperinflation have adverse effects.

Interest rate means the rate at which borrowers or lenders pay or receive for the risks undertaken and the time value of money. The interest rate of a country varies due to factors such as inflation rate, risks of investments, and the liquidity preference. There exist two types of interest rates. These are the real and nominal interest rates. Based on these interest rates it is possible to determine the market interest rates that influence investments and other key factors of the economy.

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