THE USES AND LIMITATIONS OF REAL GDP

1. WELCOME
TO OUR
PRESENTATION

2. PRESENTED TO:
DR. MOHAMMAD BAYEZID ALI
ASSOCIATE PROFESSOR
DEPARTMENT OF FINANCE
JAGANNATH UNIVERSITY, DHAKA.
PRESENTED BY:
GROUP-04

3. GROUP: 4
SL
NO.
ROLL NAME
1. B-120203032 RAJIB HUSSAIN
2. B-120203034 ASIBUL ISLAM MILU
3. B-120203043 TAJRIMA SULTANA SRISTI
4. B-120203045 MOHAMMADWASHIM
5. B-120203047 RASELAHAMED
6. B-120203055 SUJAN BHUIYAN
7. B-120203071 GAZI RAFSAN SHAHAB
8. B-120203137 AFRIN KHAN
9. B-110203091 EHSUN HOQUE

4. OUR TOPIC
ON
THE USES AND LIMITATIONS OF REAL GDP

5. GAZI RAFSAN SHAHAB
ID: B-120203071

6. THE USES AND LIMITATIONS OF REAL GDP
 We use real GDP to calculate the economic growth rate.
 The economic growth rate is the percentage change in the quantity of goods
and services produced from one year to the next.
 We measure economic growth so we can make:
 Economic welfare comparisons over time
 Economic welfare comparisons across countries
 Business cycle forecasts

7. ECONOMIC WELFARE COMPARISONS OVER TIME
 Economic welfare is a comprehensive measurement of a country’s
economic well beings. When the production of goods and services
increase that result the increasing economic welfare or standard of
livings or the increasing real GDP. So we can say that the real GDP
growth is only a part of all the items that influence economic
welfare. If the real GDP increases twice but we can’t say that
economic welfare increases twice.
 Real GDP is not a perfect measure of economic welfare for seven
reasons:

8. ECONOMIC WELFARE COMPARISONS OVER TIME
1. OVER ADJUSTMENT FOR INFLATION:
The inflation means the prices of product increase rather than number
of product. If a company increases its product price that means it has
increased its product’s quality remaining the production constant. So
ultimately the real GDP will not change. So we can say that inflation is
a factor in calculating real GDP.

9. ECONOMIC WELFARE COMPARISONS OVER TIME
2. HOUSEHOLD PRODUCTION
We know that GDP only count the market production not home
production. But in our country many home production takes place
every day. If this home production takes the place of market
production than this production will be counted in real GDP. But
actually this production is not related in counting real GDP. So there
will be a problem in counting real GDP.

10. ECONOMIC WELFARE COMPARISONS OVER TIME
3. UNDERGROUND ECONOMIC ACTIVITY
Real GDP, as measured, omits the underground economy, which is
illegal economic activity or legal economic activity that goes
unreported for tax avoidance reasons.
Example as, production and distribution illegal drugs, production that
uses illegal labor and jobs done for cash to avoid paying income of
taxes. As these activities are not included in real GDP. So it can’t
calculate actual real GDP.

11. ECONOMIC WELFARE COMPARISONS OVER TIME
4. HEALTH AND LIFE EXPECTANCY
Health and life expectancy are not directly included in real GDP. But
we know that where real GDP enables us to spend more money for
health care. So for that infant death and death in childbirth day by day
is decreasing. But now-a-days many dangerous diseases like
CANCER, AIDS are taking young lives that results in decrease real
GDP. So health and life is a problem in measuring real GDP.

12. ECONOMIC WELFARE COMPARISONS OVER TIME
5. LEISURE TIME
Leisure time, a valuable component of an individual’s welfare, is not
included in real GDP. Yet from the economic welfare view that leisure
time must be at least as valuable as the wage we earn last hour worked.
Over the years , leisure time has steadily increased. The workweek
become short and vacation days increased. These development in
economic well-being does not reflected in real GDP.

13. ECONOMIC WELFARE COMPARISONS OVER TIME
6. ENVIRONMENT QUALITY
Environmental damage is not deducted from real GDP. The burning
of hydrocarbon fuel most notable activity hampers environment.
Resources that are used to save the nature are valued as part of GDP.
An industrial society produce more atmospheric pollution than
agricultural society . But population does not always increase as we
become wealthier. Wealthy people value a clean environment and
are willing to pay for one.

14. ECONOMIC WELFARE COMPARISONS OVER TIME
7. POLITICAL FREEDOM AND SOCIAL JUSTICE
Political freedom and social justice are not included in real GDP. A
country might have a very large real GDP per person but limited
political freedom and equity.
For example, a small elite might enjoy political liberty and extreme
wealth while the vast majority are effectively enslaved and live in
abject poverty. Such an economy would generally be regarded as
having less economic welfare than one that had the same amount of
real GDP but in which political freedom were enjoyed by everyone.

15. RASEL AHAMED
ID: B-120203047

16. ECONOMIC WELFARE COMPARISONS ACROSS
COUNTRIES
 Real GDP is used to compare economic welfare in one country with that
in another.
 Two problems arise in using real GDP to compare living standards
across countries:
1. The real GDP of one country must be converted into the same
currency units as the real GDP of the other country.
2. The goods and services in both countries must be valued at the same
prices.

17. ECONOMIC WELFARE COMPARISONS ACROSS
COUNTRIES
 Using the exchange rate to compare GDP in one country with GDP in
another country is problematic.
 Because prices of particular products in one country may be much less
or much more than in the other country.
 For example, using the market exchange rate to value Chinese GDP in
dollars leads to an estimate that in 2008, U.S. real GDP per person was
19 times Chinese real GDP per person.

18. ECONOMIC WELFARE COMPARISONS ACROSS
COUNTRIES
 Figure 5.4 illustrates the
problem.
 Using the market exchange rate
and domestic prices leads to an
estimate that China is very poor.
 Real GDP per person in China is
5 percent of U.S. real GDP per
person.

19. ECONOMIC WELFARE COMPARISONS ACROSS
COUNTRIES
 Using purchasing power
parity prices or PPP prices
 China’s real GDP per
person is 12.5 percent of
U.S. real GDP per person.
Note: PPP means the expenditure on a similar commodity must be same in both currencies when accounted for exchange rate.

20. RAJIB HOSSAIN
ID: B-120203032

21. BUSINESS CYCLE FORECASTS
 A business cycle is a periodic but irregular up-and-down movement
of total production and other measures of economic activity.
 Every cycle has two phases:
1. Expansion
2. Recession
 and two turning points:
1. Peak
2. Trough

22. BUSINESS CYCLE FORECASTS
 Figure 4.4 illustrates the
business cycle.
 An expansion is a period
during which real GDP
increases.
 Recession is a period
during which real GDP
decreases—its growth rate
is negative—for at least two
successive quarters.

23. BUSINESS CYCLE FORECASTS
 Real GDP is used to measure business cycle fluctuations.
 These fluctuations are probably accurately timed but the changes
in real GDP probably overstate the changes in total production
and people’s welfare caused by business cycles.