Economic Wellbeing with Real GDP 1) The factors that are not taken into account for comparing economic wellbeing are composition of goods, disparity of income and types of goods on which the spending is done. Differences can occur due to types of goods such as capital or consumer goods, composition of goods such as defense or consumer goods. Differences can also occur due to disparity of income, for example a smaller proportion of rich population contributes more to GDP than the larger proportion of poor population. Similarly, if the high GDP is at the expense of leisure, then also it does not mean that the high GDP increases wellbeing of a nation. 2) Trade deficit does not necessarily reduce the GDP.
It does not have any effect on GDP in short-term. However, if the deficit is persistent, then the government finances this deficit through borrowing and national debt. The increased borrowing results in reduction in the money supply. Decrease in the money supply reduces the amount that people have to spend and they spend less. This reduction in expenditure reduces the GDP of a country.
Therefore, we can safely say that there is no relation between GDP and deficit in the short-run, but in the long-run relationship between the two exists. 3) We should be more concerned with real GDP. Nominal GDP does not take into account the inflation factor. Therefore any increase in the GDP figure could be due to inflation and not due to increase in physical quantity of goods. Therefore, we should be more concerned with the real GDP, where the inflation factor is eliminated and any increase in the GDP shows increase in the physical quantity of goods and services.
4) GDP is the total value of goods and services produced within the boundaries of a country. On the other hand, GNP is the total value of goods and services produced by citizen of a country, in the same country and local citizen working abroad. GNP is considered more accurate because a major chunk of economic figures are constituted by remittance sent by local citizen abroad. 5) All of these should be included as investment spending because all of these are necessary for the production of a book.
Since, none of these goods is for immediate consumption; therefore, all of these should be included in investment spending. 6) Investment spending is mainly done to earn profits, rent and dividends. It is the money spent to make more money. Hence, it is more volatile than consumer spending which includes daily purchases and necessities. Since, most of consumer purchases are necessities as opposed to investment spending; they are less volatile than consumer spending.
7) Consumer confidence shapes the investment in the economy. It results in investment flowing into a country, or flight of capital from country. As a result of which it is a factor pertaining to investment, hence it is most watched indicator to determine the health of an economy.