Principles of economics

Gross Domestic Product (GDP) is a preferred measure of a nation's income. However, using
GDP will most likely understate the national income of developing and least developed countries
relative to developed countries. In not more than 500 words, briefly discuss.

GDP is the total market value of everything produced in a country for some time regardless of
who produced it. GDP is formulated as

𝑮𝑫𝑷 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴)

From the formula, GDP has five major components, and they are as follows;

1. Personal Consumption expenditures(C): total personal or households’ expenditure on

goods & services
2. Investments(I): total value spent on goods that are predicted will be used to produce more
goods in the future
3. Government Spending (G): total spending of the Government on goods and services
4. Exports(X): total foreign expenditure on the country’s produce.
5. Imports(M): total expenditure on foreign produce.

All the five components that contribute to the calculations of the GDP are all from the formal
sectors. However, in many developing or less developed country, the informal sectors are the most
significant part of the economy. In these economics, economists or government try to estimate the
value of the informal sector. However, these estimations are either overly estimated or least
estimated. But most often than not, the estimations are less than the real value. According to Osei-
Boateng & Ampratwum(2011), Ghana, a developing country had 80% of its workforce being
employed in the informal sector. This is a common trend for most of the developing countries.

Also, most of the personal consumption expenditures are hard to estimate in developing countries
since most of the spending happens in the informal sector. The expenditures in the informal sectors
are not recorded and are hard to estimate. It is also hard to keep track of the spending since a
significant part of them are the underground economy.
The lack of proper matrices to measure the personal consumption and the actual value of the
informal sector results in undervalue of the country’s income during calculations. Thus, the
absence of the informal sector leaves a significant debt in the GDP.

References
Osei-Boateng, C. & Ampratwum, E. (2011). The informal sector in Ghana. Retrieved from
https://library.fes.de/pdf-files/bueros/ghana/10496.pdf [16-04-2020].