The uses and limitations of real gdp

WELCOME

TO OUR

PRESENTATION

PRESENTED TO:

DR. MOHAMMAD BAYEZID ALI

ASSOCIATE PROFESSOR

DEPARTMENT OF FINANCE

JAGANNATH UNIVERSITY, DHAKA.

PRESENTED BY:

GROUP-04

GROUP: 4

SL

NO.

ROLL NAME

1. B-120203032 RAJIB HUSSAIN

2. B-120203034 ASIBUL ISLAM MILU

3. B-120203043 TAJRIMA SULTANA SRISTI

4. B-120203045 MOHAMMAD WASHIM

5. B-120203047 RASEL AHAMED

6. B-120203055 SUJAN BHUIYAN

7. B-120203071 GAZI RAFSAN SHAHAB

8. B-120203137 AFRIN KHAN

9. B-110203091 EHSUN HOQUE

OUR TOPIC

ON

THE USES AND LIMITATIONS OF REAL GDP

GAZI RAFSAN SHAHAB

ID: B-120203071

THE USES AND LIMITATIONS OF REAL GDP

We use real GDP to calculate the economic growth rate.

The economic growth rate is the percentage change in the quantity of goods

and services produced from one year to the next.

We measure economic growth so we can make:

Economic welfare comparisons over time

Economic welfare comparisons across countries

Business cycle forecasts

ECONOMIC WELFARE COMPARISONS OVER TIME

Economic welfare is a comprehensive measurement of a country’s

economic well beings. When the production of goods and services

increase that result the increasing economic welfare or standard of

livings or the increasing real GDP. So we can say that the real GDP

growth is only a part of all the items that influence economic

welfare. If the real GDP increases twice but we can’t say that

economic welfare increases twice.

Real GDP is not a perfect measure of economic welfare for seven

reasons:


1. OVER ADJUSTMENT FOR INFLATION:

The inflation means the prices of product increase rather than number

of product. If a company increases its product price that means it has

increased its product’s quality remaining the production constant. So

ultimately the real GDP will not change. So we can say that inflation is

a factor in calculating real GDP.


2. HOUSEHOLD PRODUCTION

We know that GDP only count the market production not home

production. But in our country many home production takes place

every day. If this home production takes the place of market

production than this production will be counted in real GDP. But

actually this production is not related in counting real GDP. So there

will be a problem in counting real GDP.


3. UNDERGROUND ECONOMIC ACTIVITY

Real GDP, as measured, omits the underground economy, which is

illegal economic activity or legal economic activity that goes

unreported for tax avoidance reasons.

Example as, production and distribution illegal drugs, production that

uses illegal labor and jobs done for cash to avoid paying income of

taxes. As these activities are not included in real GDP. So it can’t

calculate actual real GDP.


4. HEALTH AND LIFE EXPECTANCY

Health and life expectancy are not directly included in real GDP. But

we know that where real GDP enables us to spend more money for

health care. So for that infant death and death in childbirth day by day

is decreasing. But now-a-days many dangerous diseases like

CANCER, AIDS are taking young lives that results in decrease real

GDP. So health and life is a problem in measuring real GDP.


5. LEISURE TIME

Leisure time, a valuable component of an individual’s welfare, is not

included in real GDP. Yet from the economic welfare view that leisure

time must be at least as valuable as the wage we earn last hour worked.

Over the years , leisure time has steadily increased. The workweek

become short and vacation days increased. These development in

economic well-being does not reflected in real GDP.


6. ENVIRONMENT QUALITY

Environmental damage is not deducted from real GDP. The burning of hydrocarbon fuel most notable activity hampers environment. Resources that are used to save the nature are valued as part of GDP. An industrial society produce more atmospheric pollution than agricultural society . But population does not always increase as we become wealthier. Wealthy people value a clean environment and are willing to pay for one.


7. POLITICAL FREEDOM AND SOCIAL JUSTICE

Political freedom and social justice are not included in real GDP. A

country might have a very large real GDP per person but limited

political freedom and equity.

For example, a small elite might enjoy political liberty and extreme

wealth while the vast majority are effectively enslaved and live in

abject poverty. Such an economy would generally be regarded as

having less economic welfare than one that had the same amount of

real GDP but in which political freedom were enjoyed by everyone.

RASEL AHAMED

ID: B-120203047

ECONOMIC WELFARE COMPARISONS ACROSS

COUNTRIES

Real GDP is used to compare economic welfare in one country with that

in another.

Two problems arise in using real GDP to compare living standards

across countries:

1. The real GDP of one country must be converted into the same

currency units as the real GDP of the other country.

2. The goods and services in both countries must be valued at the same

prices.

Using the exchange rate to compare GDP in one country with GDP in another country is problematic.

Because prices of particular products in one country may be much less or much more than in the other country.

For example, using the market exchange rate to value Chinese GDP in dollars leads to an estimate that in 2008, U.S. real GDP per person was 19 times Chinese real GDP per person.


COUNTRIES


COUNTRIES

Figure 5.4 illustrates theproblem.

Using the market exchange rateand domestic prices leads to anestimate that China is very poor.

Real GDP per person in China is5 percent of U.S. real GDP perperson.

Using purchasing power

parity prices or PPP prices

China’s real GDP per

person is 12.5 percent of

U.S. real GDP per person.


COUNTRIES

Note: PPP means the expenditure on a similar commodity must be same in both currencies when accounted for exchange rate.

RAJIB HOSSAIN

ID: B-120203032

BUSINESS CYCLE FORECASTS

A business cycle is a periodic but irregular up-and-down movement

of total production and other measures of economic activity.

Every cycle has two phases:

1. Expansion

2. Recession

and two turning points:

1. Peak

2. Trough


Figure 4.4 illustrates the

business cycle.

An expansion is a period

during which real GDP

increases.

Recession is a period

during which real GDP

decreases—its growth rate

is negative—for at least two

successive quarters.


Real GDP is used to measure business cycle fluctuations.

These fluctuations are probably accurately timed but the changes

in real GDP probably overstate the changes in total production

and people’s welfare caused by business cycles.

Economy & Finance

The uses and limitations of real gdp