Thursday, October 10, 2013

13. Measuring the Economy: GDP

GDP refers to the total market value of all the final goods and services produced and sold in within the borders of a specific geographical area (such as within the borders of a country) within a given period - normally a year. Why is it calculated? Often students say it is to enable governments to manage the economy. Governments don't manage economies - they are pretty powerless to do so and it is not their function to do so. At best they can only create the climate in which individuals and firms can do business and set up some rules as how production and trade can take place - usually modern governments do this by removing the obstacles in the way of production and trade. These conditions relate to the monetary and fiscal frameworks of a country. Countries that have less government involvement in the economy have higer GDP growth rates than countries with larger government involvement (EFW Report, 2013). A low tax regime would for example attract more Foreign Direct Investment than contries with high taxes. GDP is measured through various methods that attempt to measure economic activity during the different stages of the circular flow of income and expenditure. One point of measurement is when expenditure takes place. So what is measured is all the expenditure by the main actors on final goods - this includes the consumption expenditure by individuals, expenditure by governments and net purchases by foreigners (less imports). C.M. Heydenrych Johannesburg 2013.

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