|Define GDP in your own words. Additionally, address the following:What is measured and, just as importantly, what is not measured?|
What has GDP been for the latest three quarters here in the US?
Why is GDP mentioned in business news so often and used as an important metric for our economy? Is this number accurate? What are the pros and cons of this measurement?
Explain how real GDP is different and how it is calculated.
Gross Domestic Product measures the monetary value of final goods and services produced in a country within a specified period, such as one year. GDP includes final goods and services, intermediate goods that are yet to be used in final goods and services, and raw materials produced but not yet used in the production of intermediate or final goods. GDP does not measure used goods, transfer payments, non-market activities, illegal goods, goods produced outside a country’s borders, and intermediate goods converted into final goods and services.
According to the U.S. Bureau of Economic Analysis, the GDP for the U.S. in the last three quarters has been as follows: $24,851,809 trillion in Q2 2022; $24,386,734 trillion in Q1 2022; and $24,002,815 trillion in Q4 2021 (FRED economic data, 2022). All firms operate in the economy, and their potential is related to the state of the economy. Therefore, GDP is mentioned in business news because it indicates the size of the economy and how the economy is performing (Dwarakanath & Shivakumara, 2022). For instance, an increase in GDP implies that the economy is doing well. It enables policymakers and central banks to judge whether the economy is shrinking or expanding and take necessary actions. Businesses can also determine the impact of fiscal policy, monetary policy, and tax and spending plans.
GDP is usually accurate provided the data used is credible, but it is not the most effective measure of an economy. There are several ways to calculate the GDP, including the income and expenditure approaches, but all these should give the same figure. However, GDP is still not effective because it ignores some crucial aspects of the economy, such as the environmental damage caused by production, failure to account for income inequality, and the exclusion of non-market transactions. Pros of GDP measurement include: It provides a headline number to focus on the economy’s condition; it is the mainstay of modern macroeconomic analysis; it uses well-established international accounting principles; its concepts get modified as the economy changes. There are several cons. It does not consider human well-being, may not be a perfect indicator during uncertainties, while excluding non-market activity and important indicators such as ecosystems, climate change, inequality, and sustainability.
Real GDP is different because it measures the yearly production of goods and services at the actual cost without considering the effect of inflation. Therefore, it allows GDP comparison by year, indicating trends in the economy. Real GDP is calculated by dividing nominal GDP by the GDP deflator.
Dwarakanath, G. V., & Shivakumara, T. (2022). WORLD’S GDP PREDICTION USING MACHINE LEARNING. Journal of Positive School Psychology, 1039-1047.
FRED economic data. (2022). Gross Domestic Product. Stlouisfed.org. https://fred.stlouisfed.org/series/GDP
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