One approach to Gross domestic product Essay

Published: 2020-02-26 02:00:38
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Category: Gross domestic product

Type of paper: Essay

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There are several approaches to calculating GDP and what must be kept in mind thought is that the end result or the figure achieved by employing any means of calculating a GDP is the same. I, for the purpose of this paper, have chosen the expenditure approach to GDP and the country in point is USA. The expenditure approach basically has four components:

a) Personal consumption

b) Gross private domestic investment

c) Government purchases

d) Net exports.

a) Personal consumption: personal consumption includes all expenditures on durable and non-durable good by households and also expenditures made on services.

b) Gross private domestic investment: All final purchases of machinery, equipment and tools by business enterprises is included in the gross private domestic investment, intermediate goods are not counted so as to avoid double counting. All construction done within the country in a financial year is also included. If there is a positive change in inventories then the monetary value of that amount is added to gross domestic private investment for that year and if there is a negative change then it is subtracted from the gross private domestic investment for that year.

c) Government expenditure: government expenditure includes all expenditure on goods and services by the government and also on social capital such as schools and roads.

d) Net exports: net exports is counted as a GDP factor because we need to avoid overstating the total production of goods in USA. Net exports mean the total amount of exports less the total amount of imports.

Two factors not included in GDP:  Although the GDP is a comprehensive method of calculating the moneys value worth of goods produced in an economy it is not designed to take into account several factors:
a) leisure time: The GDP does not take the leisure time into consideration, the average work hour in the USA has decreased from 53 in 1990s to about 35 hours(citation: mcconnel economics 15th edition) and hence the quality of life has increased but the GDP is a quantitative measure and not a qualitative one and hence does not take this into account.

b) improved quality product: The quality of the products have increased worldwide and have done so considerably in the US. There is a very real difference between a $3000 computer purchased today and one purchased a decade ago(citation: mcconnel economics 15th edition), again the GDP does not measure the quality involved.

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