Macroeconomics Concepts and GDP

Macroeconomics Concepts and GDP

Monitoring economic growth is a key area of focus for economists. Gross domestic product, abbreviated GDP, is one of the measures used by economists to determine economic growth rate. GDP has two versions: real GDP and nominal GDP. The latter, which is typically known as simply GDP, is a measure of “the total value of goods and services produced in an economy in a given time period by calculating all their quantities and all their prices” (Hall, 2021 para.2). This is to say that nominal GDP measures monetary value of final services as well as goods produced within a country’s borders. It differs from real GDP in that while nominal GDP uses current prices to measure value of output, real GDP uses constant prices. In other words, “real GDP is nominal GDP adjusted for inflation” (Hall, 2021 para.5). More specifically, nominal GPD calculates market value based on prevailing prices, meaning it changes when process change even though actual output remains the same. In contrast, real GDP remains the same even when prices fluctuate, as long as actual output remains the same.

Judging by the above definitions, it is clear that real GDP is a more accurate measure of economic wellbeing. Economists therefore prefer real GDP to nominal GDP when measuring a country’s economic wellbeing, a major reason being that real GDP takes inflation into consideration, unlike nominal GDP. Unless adjustments for inflation are made, it would be difficult to determine whether value of output has increased due to price increases or higher quantities of goods and services. For example, a strong growth in real GDP indicates that employment is growing and the economy is flourishing (Callen, 2020).

A large GDP is considered a good thing not only because it signals growth in employment but also shows that the overall health of economy is good. In the words of Cullen (2020), as long as a country is not facing inflation problems, a large GDP indicates better wellbeing for business, employees, and citizens. Nevertheless, not all instances where GDP is large may be considered desirable. Callen (2020) cautions that although a measure such as GDP per capita indicates the well-being of citizens, there are some things that GPD does not capture, and which determine wellbeing. An example is pollution, which is likely to increase proportionally with increased output.

References

Callen, T. (2020). Gross domestic product: an economy’s all. www.imf.org/external/pubs/ft/fandd/basics/gdp.htm

Hall, M. (2021). When do economists use real GDP instead of just GDP? www.investopedia.com/ask/answers/030515/when-do-economists-use-real-gdp-instead-gdp.asp