The limitations of GDP in measuring national economic welfare

Macroeconomics

Why is economics considered as a social science? What role does economics play in your personal and professional lives?

Economics is considered as a social science because it deals with human behavior as to how individuals try to satisfy unlimited wants with the limited or scarce resources. (Sowell, 2010)

Economics has a very important role in our lives, we may not realize it but any decision we take, anything we do, economics is involved. Looking at it at a personal level, deciding whether to study or sleep highlights the concept of opportunity cost. In our professional lives, the economy guides us as to how the company is supposed to run and the strategies and decisions that are to be made.

What is the difference between real and nominal GDP? Does GDP accurately reflect the nation's welfare? Why or why not? How can a country's GDP be manipulated? In your opinion, is the U.S. GDP being manipulated? Explain your answer.

The difference between the nominal GDP and the real GDP is that the nominal GDP is not accounted for inflation whereas the real GDP is. (Mankiw, 2002) GDP does not very accurately measure the welfare of the nation. The reason being that the GDP doesn't include what is going on in the secondary market for example exchange of goods and services or if someone is growing their own food or if someone is buying something second hand, so we can say that GDP does not accurately reflect the nation's welfare. (Brue, Flynn, & McConnell, Macroeconomics, 2011)

There are several ways in which a country's GDP can be manipulated. This can be done by using the exchange rates or more importantly by changing the factor used for inflation or deflation keeping in mind that the factor is highly subjective. In my opinion, U.S. GDP is being manipulated as usually those economies, which have high debts have artificially high GDPs as well. The United States has a large amount of debt and so do its citizens. Therefore, our GDP is artificially inflated.

3)

What are the different types of unemployment? How do they affect the economy in terms of growth, labor force, and price of labor? Cite specific examples to support your response.

There are three types of unemployment, namely structural, frictional and cyclical. Frictional unemployment does not affect the economy that much as it is just people switching from one job to another. Structural unemployment cuts down the cost of labor since the supply of labor is high. Cyclical unemployment does not affect the overall cost of labor.

4)

Identify economic factors that affect the real GDP, the unemployment rate, the inflation rate, and a key interest rate. How do you predict the economy will perform in the next two years given the current state of two of the economic factors you identified? How might your organization be affected by these changes?