Macroeconomics
working hours per week. This allows householdstoenjoymoreleisuretimeandimprovetheir well-being, but is not captured by GDP. ● Informal or Underground Economy: Most illegal transactions are missedbytheGDPunless they are “laundered” into legitimate business. Income that is earned but not recorded as income for tax purposes is also missed although some adjustments aremadetoGDPtotake misreported income into account. This phenomenon, also known as shadow economies or black markets , exists in most economies but is morecommon in developing countries. ● Ignored Standard of Living: A country’s GDP might be high, but not all people might be beneftingfromit.Whenitcomestocalculatingtheshareofaneconomy’soutputperindividual, GDP fgures can be misleading. To accurately assess the standard of living, the realGDPper capita is used instead. It calculates the averagereal output per person as follows: Real GDP per capita = For instance, a GDP of $4 billion might be perceived as high, however, assuming that the populationsizeis50millionpeople,thenrealGDPpercapita=$80.Inthiscase,thestandardof living and quality of life are very low. ● DisregardedExternalities: Everyyear,productionresultsinwaste,pollution,andthedepletion of resources. Production externalities, which represent the costs of producing goods and services to the society, are not considered when measuring GDP. Thisoverstatesthevalueof GDP. ● Uneven Distribution of Output: Since GDP does not reflect how output is distributed over households, uneven distributions can be missed. For example, 90% of the total outputmight onlybedistributedover10%ofthepopulation.Thisleadsto socialinequality and widensthe gap between the rich and the poor. Other National Income Accounts In addition to GDP, other national income accounts are increasing in importance as a measure of economic performance. These accounts capture the aspects of an economy that might have been missed by GDP, and include the following: ● Net Domestic Product (NDP): GDP alone doesn't provide a comprehensive understanding of economic sustainability, especially when considering the wear and tear experienced by capital goods. Net Domestic Product (NDP) addresses this limitation by accounting for the impact of depreciation on GDP. Depreciation, as previouslydefned,refersto thereductioninthevalueof capital goods over time due to various factors such as usage, obsolescence, and physical deterioration. It represents the cost that businesses mustconsidertomaintainandreplacetheir capital stock. NDP = GDP − depreciation
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