GDP Growth Rate

1.      The Gross Domestic Product growth rate measures the increase in value of the goods and services produced by an economy.

2.      Economic growth is usually calculated in real terms or inflation-adjusted terms, in order to net out the effect of changes on the price of the goods and services produced.

3.      The Gross Domestic Product can be determined using three different approaches, which should give the same result. These different methods are the

a.     product technique,

b.     the income technique , and

c.     the expenditure technique.

4.      In sum, the product technique sums the outputs of every class of enterprise to arrive at the total.

5.      The expenditure technique works on the principle that every product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying products and services.

6.      The income technique works on the principle that the incomes of the productive factors must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

7.      The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.

8.      However, there are some problems in using growth in GDP per capita to measure the general well-being of a country´s population. In fact, GDP was first developed by Simon Kuznets for a US Congress report in 1934, who immediately said not to use it as a measure for welfare.

a.     First, GDP per capita does not provide much information relevant to the distribution of income in a country.

b.     Second, GDP per capita does not take into account negative externalities such as pollution consequent to economic growth.

c.     Third, GDP per capita does not take into account positive externalities that may result from services such as education and health.

Finally, GDP per capita excludes the value of all the activities that take place outside of the market place such as free leisure activities or less positive activities like organized crime.

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