Macabanti, Patricia Janelle P.

BSED 3-A

1. Explain why GDP is a good measure of the economy’s performance?

Answer: GDP calculates the net income of both the government and the overall spending on
goods and services of the state. It is one of the most widely used measures of an economy’s
output or production. It is defined as the total value of goods and services produced within a
country’s borders in a specific time period monthly, quarterly or annually. GDP is an
accurate indicator of the size of an economy. It defines the growth of an economy.

2. Notwithstanding the importance of Nominal GDP, why is Real GDP better than Nominal
GDP in comparing economic performance in a given point in time?

Answer: Nominal GDP is the value of all the final goods and services that an economy produced
during a given year. It is calculated by using the prices that are current in the year in which the
output is produced. In economics, a nominal value is expressed in monetary terms. For example,
a nominal value can change due to shifts in quantity and price. Real GDP is better than nominal
GDP because in real GDP is the total value of all of the final goods and services that an economy
produces during a given year, accounting for inflation. It is calculated using the prices of a
selected base year. Real gross domestic product accounts for price changes that may have
occurred due to inflation. In other words, real GDP is nominal GDP adjusted for inflation. If
prices change from one period to the next but actual output does not, real GDP would be
remaining the same. Real GDP reflects changes in real production. If there is no inflation or
deflation, nominal GDP will be the same as real GDP.

3. Why is it that, the two approaches in measuring GDP (Expenditure and Income
Approach) always ends up arriving at the same calculation?

Answer: These two quantities are equal because every final good and service produced in the
economy is either purchased by someone or added to inventories, and additions to inventories are
counted as spending by firms. Next, consider the relationship between aggregate spending on
domestically produced final goods and services and total factor income. These two quantities are
equal because all spending that is channelled to firms to pay for purchases of domestically
produced final goods and services is revenue for firms. Those revenues must be paid out by firms
to their factors of production in the form of wages, profit, interest, and rent. Taken together, this
means that all three methods of calculating GDP are equivalent.

4. Explain the important role of GDP in economic policy making towards growth.
Answer: The important role of GDP in economic policy making towards growth GDP is
important as it offers information on the scale of an economy and how it performs. Real GDP
growth rates are also used as measures of the economy's general health. Generally speaking, an
improvement in real GDP is perceived as a indication that the economy is doing well. As real
GDP grows strongly, employment is likely to grow as firms hire more workers for their factories
and people have more money in their pockets. As in many countries during the recent global
economic crisis, when GDP is shrinking, employment often declines.

5. Explain the why GDP and Per Capita GDP cannot really measure the standard of living
of people within the economy?

Answer: The reason why GDP and per capita GDP cannot really measure because does not
consider unpaid labour. Unpaid work includes critical activities, such as in-home child care or
elder care, volunteer work, and housework. Unless there were these support activities, many
activities that are included in GDP would not have been possible.