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Fill in the blank cells for the following table. || || 2006|| 2010|| 2015 |Wages|20.5|21.3|22.4...

Question:

Fill in the blank cells for the following table.

2006 2010 2015
Wages 20.5 21.3 22.4
Interest Received 1.1 0.7 0.5
Interest Paid 5.4 6.5 7.2
Rents 15.5 16.4 19.6
Profits 12.2 14.6 20.4
Nominal GDP

Name and describe at least 3 problems with the measurement of GDP. Why are these problems so bad? What complications do they cause? Is there a way to fix these problems? What are some other metrics we might use to measure well-being? Why might these be better?

Gross Domestic Product

Gross Domestic Product or GDP is the sum of the market value of various goods and services. It is an important determinant of defining the health of a nation as it gives an idea about the size and productive capacity of the nation. Also, GDP can be calculated with the help of three methods, namely, Product Method, Income Method, and Expenditure Method.

Answer and Explanation:

The formula used to calculate nominal GDP is:

{eq}No\min al\;GDP = Wages + Interest\;{\mathop{\rm Re}\nolimits} ceived + {\mathop{\rm Re}\nolimits} nts + \Pr of its {/eq}

The three problems with the measurement of GDP are:

1) Non-monetary Exchanges:

GDP ignores non-monetary exchanges such as the services offered by the housewives, even though these services also have an impact on the welfare of the people.

2) Unequal income distribution:

GDP only talks about the income of the nation, but it does not provide information about the income distribution of the nation. Therefore, any country with a high GDP may suffer from the problem of poverty due to unequal income distribution, and therefore, GDP fails to give exact information about the welfare of the people in the nation.

3) Externalities:

Externalities refer to the cost borne or benefit received by any individual or group of individuals due to the activities of third party. GDP does not include the effect of externalities and, therefore, either over or underestimate the welfare of the nation.

The problems mentioned above are bad because no particular steps are being taken to remove all these limitations. These problems cause many complications as they lead to either under estimation or over estimation of GDP. Due to this reason, the GDP does not show an accurate picture of the society. It depicts a wrong standard of living of the people and their welfare in the economy.

Yes, there is a way to fix these problems. These can be fixed by the following ways:

1) Human Development Index (HDI):

HDI is an index used to determine the welfare of people in the country and the development of a country. It takes into account the three most important dimensions used to assess the welfare and development of the country. These dimensions are: education, health and life expectancy, and standard of living.

2) Gross National Happiness Index:

This approach of measuring GDP is a based on many indicators. The major dimensions on which these indicators are based are: socio-economic development, environmental conservation, governance, and cultural preservation. As it is based on many indicators so it is a much better representative index.

3) Social Progress Index:

This index is based on three major dimensions like foundations of well-being, human needs and opportunity. These include indicators like nutrition, health, education, and so on. This index is a better method to calculate the welfare of the people in an economy.

These indices are better to calculate the welfare of the people in an economy as they are based on many multiple dimensions which provide a more broad view of the society. Also, GDP cannot be replaced easily, so some of these measures should also be used in association with GDP to calculate more representative and accurate results.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
62K

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