Answer to Question #204855 in Macroeconomics for nawaf

Question

Elaborate four reasons with examples that why GDP is still considered the most important indicator of well-being of people of a country.

Answer 1

• GDP is the most suitable measure for theoretical analysis in economics. This is due to what it comprises of: market value of all goods and services produced within a geographical region at a point in time.
• It is also a good way of representing all spending within the economy for theoretical purposes. The other measures mentioned (NDP, NNP and NNI) either exclude a type of spending (i.e. depreciation - the amount of GNP required to purchase new goods to maintain existing stock in the case of NDP and NNP; and indirect taxes in the case of NNI), or include a form of spending that necessarily has to be excluded for theoretical purposes (i.e. overseas production by citizens and overseas income by citizens in the cases of GNP, NNP and NNI).

• In addition to its relatively better ease of measurement, GDP is also the best measure when assessing short-term economic fluctuations that reflect the business cycle.
• GDP is the only useful tool for measuring national development because there are great difficulties in identifying who owns what.