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the advantages disadvantages of using Gross Domestic Product as a measure of Productivity economic health?

mrs. Vee - 2007-12-01 11:39:44 - Economics

Explain what the advantages and the disadvantages are of using Gross Domestic Product as a measure of productivity and economic health? Explain your answer.

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Best Answer:

Nominal and real GDP are horrible measures of economic health and productivity. GDP simply tells you the size of the economy measured by output. Change in real GDP is a little better because it captures productivity, but confounds it with population growth. So, it is an imperfect proxy for productivity. Further, change in GDP contains some information about the health of the economy- is it growing or shrinking and how quickly, but it isn't relative to anything. Per capita GDP tells you, on average how much output each person provides to the economy, and is therefore a measure of economic health. However, this tells you nothing about the distribution, potential, or sustainability of the economy. Change in per capita gdp is a pure measure of productivity because it controls for population size. Again, the information content about the health of the economy is limited for the same reason mentioned in the second paragraph. In all cases, a better understanding of an economy's health and productivity can come from 1. comparing the measures to those of other economies, 2. looking at what is happening to individual components, 3. what is happening to them over time, 4. incorporating additional measures such as a Gini index (income distribution), a Hirfandhal index (industry concentration), or anything else that you can think of. These add context to simple GDP based numbers, 5. use different deflators- such as labor force or number of people with degrees.

Answers:

Nominal and real GDP are horrible measures of economic health and productivity. GDP simply tells you the size of the economy measured by output. Change in real GDP is a little better because it captures productivity, but confounds it with population growth. So, it is an imperfect proxy for productivity. Further, change in GDP contains some information about the health of the economy- is it growing or shrinking and how quickly, but it isn't relative to anything. Per capita GDP tells you, on average how much output each person provides to the economy, and is therefore a measure of economic health. However, this tells you nothing about the distribution, potential, or sustainability of the economy. Change in per capita gdp is a pure measure of productivity because it controls for population size. Again, the information content about the health of the economy is limited for the same reason mentioned in the second paragraph. In all cases, a better understanding of an economy's health and productivity can come from 1. comparing the measures to those of other economies, 2. looking at what is happening to individual components, 3. what is happening to them over time, 4. incorporating additional measures such as a Gini index (income distribution), a Hirfandhal index (industry concentration), or anything else that you can think of. These add context to simple GDP based numbers, 5. use different deflators- such as labor force or number of people with degrees.

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