Sage-Tips

Why GNP is not a good measure of welfare?

Conclusion: Because GNP measures the market value of final goods and services, it can only reflect the amount of money that society exchanges for commodities. We should remember that GNP is a good summary measure of national output. It is not an indicator of social welfare.

Why must you avoid double counting when measuring GDP?

Why must you avoid double counting when measuring GDP? The output is counted more than once as it travels through the stages of production. This could lead to major mistakes.

What components are excluded in calculating national income and why?

Items to be Included or Excluded in National Income with Reasons

• Construction of a new house.
• Winning of a lottery prize.
• Increase in the prices of stocks lying with a trader.
• National debt interest.
• Rent-free house given to an employee by an employer.
• Profit earned by foreign banks in India.

What are the drawbacks of using national production to measure economic development?

However, it has some important limitations, including: The exclusion of non-market transactions. The failure to account for or represent the degree of income inequality in society. The failure to indicate whether the nation’s rate of growth is sustainable or not.

Why are imports not included in national income?

Imports are subtracted in the national income identity because imported items are already measured as a part of consumption, investment and government expenditures, and as a component of exports. This means that imports have no direct impact on the level of GDP.

What is meant by problem of double counting how this problem can be avoided?

The problem of double counting arises when the value of certain goods and services are counted more than once while estimating National Income by Value Added Method. Two methods to avoid the problem of double counting : (i) To count only the value of final products.

How does double counting affect the measure of national income?

Its impact on the economy is very huge as the GDP of the nation is calculated on the value of commodities and if there is double counting, then the value of the commodity is higher and thus the domestic product will be higher than it should be and it will act as a money multiplier.

Why illegal activities are excluded from gross domestic product?

Income from illegal activities are not included in the GDP, and hence GDP understates actual economic activities. They are not excluded because they are immoral, but the amounts are not reported. Also, cash payments “under the table” to corrupt officials and businessmen are not reported.

Why subsidy is added in national income?

Value of output must equal the value of all incomes. So, subsidies are to be added. Thus, by subtracting taxes and adding subsidies from GDP at market price, one obtains GDP at factor cost.

Why is the national income not the best measure of economic welfare?

GNP is not a satisfactory measure of economic welfare because the estimates of national income do not include certain services and production activities which affect welfare.

How to get the national product figure of a country?

To obtain national product figure of a country, we aggregate the money value of all final goods and services produced in a country in a year. The figure that we obtain is called GNP or GDP. [For the moment, we won’t make any distinction between these two concepts. We will use them interchangeably.]

What is product method in macroeconomics?

Product Method Under this method, we add the values of output produced or services rendered by the different sectors of the economy during the year in order to calculate the National Income. In this method, we include only the value added by each firm in the production process in the output figure.

How do you calculate the value added of a firm?

Each firm’s value added is the value of its output minus the value of inputs that it purchases from other firms. Thus, value added = firm’s revenue – costs of intermediate goods. In brief, value added is the increase in the value of goods as a result of the production process.

Why are intermediate goods not used to compute national product?

Intermediate goods are not to be used to compute national product to avoid the problem of multiple counting. Thus, the final goods approach to national income adds up the total money value of all final goods and services produced. Instead of counting the value of final goods, one can adopt an alternative method and arrive at the same result.