Gross domestic product

Question 1

Define GDP

Answer 1

Gross domestic product is an economic indicator that measures the total value of all goods and services produced within a country by its factors of production in a given time period, usually one year

Question 2

Define real GDP

Answer 2

Real gross domestic product is the total value of all goods and services produced in a country within a specific time period adjusted for changes in the price level or inflation. This provides a more accurate measure of economic performance overtime because it shows the true growth by using Constant prices for a Base year

Question 3

Distinguish between nominal GDP and real GDP

Answer 3

1. Nominal GDP uses current prices and does not adjust for inflation or deflation. It can be misleading. If prices have changed significantly wise real GDP are just for changes in the price level, giving a clearer picture of an economies actual growth by using constant prices.
2. Nominal GDP is useful for comparing economic output of different time periods in the same year, but not for longer periods due to price changes. Real GDP is better for comparing economic performance over different years because it removes the effects of inflation, allowing for a true comparison of economic growth.
3. Nominal GDP can show growth due to rising prices rather than the actual increases in production wise. Real GDP only reflects to growth in volume of goods and services produced excluding the impact of price changes.

Question 4

Explain GDP’s use as an indicator of economic performance

Answer 4

1. Primary indicator used to go to the head of an economy as increasing GDP indicates economic growth.
2. Provides an average economic output per person which is used as a rough indicator of the standard of living.
3. Governments and policymakers use GBP to formulate economy policies and make decisions regarding taxation spending and monetary policy.
4. Investors use GDP growth rates to make informed decisions about investing in a country.

Question 5

Calculate the nominal GDP from national income data using the formula

Answer 5

GDP = FCE + I + (X-M)

Question 6

How do you calculate real GDP per capita

Answer 6

Real GDP
Real GDP per capita = —————
Population

Question 7

Discuss the limitations of the use of per capita, real GDP in judging performance of economies

Answer 7

1. Income distribution as real GDP per capita does not account for a income is distributed within a country
2. it excludes the non-market activities like household labour and volunteer work, which contributes to well-being.
3. Sale of secondhand goods does not form part of GDP.
4. It does not directly measure factors that contribute to the quality of life, such as health and environment quality.