Introduction to Macroeconomics

A single estimate is then derived and published as the official estimate of GDP. There are two ways to measure the GDP, Real and the Nominal. Every country uses estimates of GDP in real terms as the international standard to measure growth in an economy. It is essential to follow a common standard to allow meaningful comparisons between different economies. The United Kingdom follows the international conventions and European Union guidelines.
This paper examines the GDP as a metric for measuring the health of an economy. It begins by analysing the distinction between the real and the nominal GDP and then goes on to elucidate the voids in using GDP as a sole quantifier of the national economy. It then suggests other alternatives and gives the relative merits of using other systems to access the state of the national economy of any country.
The GDP of every economy tends to rise over a period of time.
This rise in the size of the expenditure could be due to two reasons, either due to an increase in output or due to an increase in prices. If the GDP has risen because of more production of goods and services in the country then there is economic growth, but if the rise in GDP is due an increase in the prices of the goods and services. then the economy has experienced inflation and not growth in production. Economists have devised two ways to measure GDP these are the nominal GDP and the real GDP. The real GDP is the value of the GDP at constant prices using a given base year value. It excludes any inflation and reflects the changes purely in volume terms. thus giving the actual level of economic activity. It is estimated using chained volume measures. The nominal GDP gives the value of GDP at current prices, prices for which year the GDP is taken. Growth in nominal GDP reflects the effects of inflation, as well as real GDP growth. It reflects a change in value terms. For example, to calculate the value of 1999 nominal GDP, we will sum the value of all expenditures in 1999, using the prices that prevailed then. The real GDP would be calculated by taking the sum of the values of all the expenditures in 1999, but using the prices that prevailed in the base year (2003). When economists need to quantify inflation they take the ratio of nominal to real GDP and take its percentage. This then is called the GDP deflator.

Efficacy of GDP as a Measure.&nbsp.&nbsp.The famous economist S. Kuznets who is regarded as the creator of the concept of GDP &nbsp.&nbsp.defines it as the gross total of all the final production of goods and services, with it making no distinctions between transactions that add to the social welfare and those that don’t.&nbsp.