Discuss whether GDP is a good measure of economic growth (6)
GDP (gross domestic product) is a measure of the total output of a country's
economic activity. It is a figure composed of Government spending, exports-
imports, consumption and investment.
Reasons why GDP is a good measure of economic growth is that it is relatively
easy to calculate, reliably demonstrates the growth in output of an economy and
is easily comparable to other countries. This means that it is easier for policy
makers to make judgements on the economic state of the country (or region) and
target policies to improve economic growth or overall welfare.
One reason GDP is not a good measure is that when transformed into other
statistics (e.g. GDP/CAPITA) it does not take into account Inequality in economic
growth as it is a cumulative measure. This means that while one area of a region
may be growing quickly, another may be experiencing economic decline. this is
not specified in the classic GDP measure and means that regions may be
overlooked when economic policies are made. In addition, GDP per capita does
not factor in elites in a population. For example, if a country has high inequality
(represented by a high Gini coefficient), a small fraction of the population may
hold an income share that is excessively greater than average. This means that
while it may appear that the economy is growing, the growth may be experienced
by only a small fraction of society.
Another reason why GDP can be considered a poor measure of economic growth
is because it is a cumulative statistic. This means that size will vary based on
population. For example, a country with a much smaller population is likely to
have a much smaller GDP. Therefore, it is better to use GDP per capita as a
measure of economic growth and thus as a proxy for living standards.
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