session 1-2

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country in a given period.

Advantages of GDP

Allows standardized comparison over time and across countries; essential for analyzing economic development trends.

Limitations of GDP

Does not consider income distribution, non-market transactions, and does not imply improved well-being.

Exchange Rate Conversion

Necessary to compare GDP across countries that use different currencies.

Market Exchange Rate Method

Converts GDP using the prevailing foreign exchange rate.

Purchasing Power Parity (PPP)

Adjusts GDP for differences in the cost of living between countries.

Purpose of PPP

To ensure the same basket of goods/services costs the same in different countries.

International Comparison Program (ICP)

A global initiative collecting price data for goods and services across multiple countries.

Key Findings of ICP

GDP in low- and middle-income countries is often underestimated by exchange rates.

Stiglitz, Sen & Fitoussi Report

Aimed to identify limitations of GDP as an economic and social indicator and recommend alternative measures.

Issue with GDP and well-being

GDP measures economic production but ignores the quality of life.

Inequality in GDP measurement

GDP averages income, failing to reflect income disparities within a population.

Sustainability in GDP measurement

GDP does not track debt, resource depletion, or environmental costs.

Alternative Indicators for Progress

Measures that focus on well-being, including material living standards, health, education, and environmental quality.

Importance of Household Income

Tracks actual earnings and expenses rather than total national production.

Tracking Wealth

A better long-term measure than GDP; should include physical, human, and social capital.

Non-Market Activities in GDP

Unpaid household labor and community work contribute real economic value that GDP ignores.

Subjective Well-being Indicators

People's self-reported happiness and life satisfaction should be included in national statistics.

Key Recommendation: Improve GDP Measurement

Adjust for income distribution and purchasing power.

Key Recommendation: Use Alternative Well-being Indicators

Track health, education, security, and environmental conditions.

GDP’s Flaw

Ignores inequality, non-market activities, and sustainability.

PPP vs. Exchange Rates

PPP provides a more accurate cross-country income comparison than market exchange rates.

Economic Growth vs. Progress

Economic growth is not always synonymous with progress; multidimensional metrics are needed.

Exchange rate used in example

49 INR = 1 USD is used to convert India's GDP.

Example of GDP Misleading

Traffic congestion increases fuel sales, raising GDP while quality of life declines.

Quality of Life Indices

Develop indices that reflect the well-being beyond just economic production.

Global GDP Share (

Low- and middle-income countries account for only 29% of global GDP under market rates.

India's GDP under PPP

PPP-adjusted GDP is 3.5 times higher than the exchange-rate-based GDP.

Joseph Stiglitz and Amartya Sen

Led the 'Mismeasuring Our Lives' report to emphasize the need for better economic metrics.

High GDP but Poor Sustainability

A country with high GDP but depleting resources is not truly wealthy.

Environmental Degradation and GDP

Boosts GDP artificially through costs of cleanup while lowering overall quality of life.

Denmark's Happiness Ranking

Illustrates that high happiness can exist despite lower GDP growth.

Recommendation to Track Well-being

Include health, education, environmental conditions in economic evaluations.

Real GDP

Adjusted for inflation; measures the true value of goods and services at constant prices.

GDP Per Capita

The GDP divided by the population; provides an average economic output per person.

Nominal GDP

Calculated at current market prices; does not account for inflation.

Structural Changes in GDP

Alterations in the economy that affect overall GDP, like changes in consumer behavior or technology.

GDP Growth Rate

The percentage increase in GDP from one period to another; indicates how fast an economy is growing.

GDP Deflator

A measure of price inflation/deflation with respect to a specific base year.

Contribution to GDP

The economic sectors (agriculture, services, industry) and their percentage contributions to total GDP.

GDP and Unemployment Relationship

Typically, as GDP grows, unemployment tends to decline; reflects economic activity levels.

Nominal vs. Real GDP

Nominal GDP measures current market prices, while Real GDP accounts for inflation.

Impact of Government Spending on GDP

Increased government spending directly influences GDP, as it injects money into the economy.