In what ways does GDP overstate income within a nation
Gross Domestic Product (GDP) can be termed as one of the most widely used measures of the production or output of any economy. It can be summed up as the total value of the services and goods that are produced within the borders of a given country for a specified period. This can be monthly, quarterly, or also annually. The value obtained is used to determine the net income of each citizen of the nation by dividing through by the entire population. This number can either be higher or lower than the actual income of the common citizen. This gives birth to the idea of overstatement and understatement of the income of a country (Benford et al, 2016). Overstatement occurs when the determined income is more than the actual income that a citizen receives. This can be affected by the inclusions that are made during the calculation of the GDP of the country.
A country might have a high GDP while the income of the common citizen is very low. Take an instance where the country is reliant on a certain product such as oil exportation. You find that in this case, the country will have a high GDP that has been derived from the oil extraction activities. However, the oil export only helps a certain group of people and leaves a load of the rest without getting a share of the same. This makes the GDP income value imaginary in some parts of the country. There are often industries that are found overseas and that provide profits for the mother country. The profits from these countries are not take into consideration within the GDP calculation process (Lleras-Muney, 2018). This might as well lead to an overstatement of the income value. This happens especially since failing to include the profits might lead to overstatement of the actual economic output of a country.
Increasing the prices of goods at market level has been an issue when it comes to the calculation of the GDP of a country. Once the prices are on the rise, the GDP will have risen as a result. However, this does not mean that the income of the citizen has risen in any way. The result of the rise in the prices is that the citizen will be associated with a higher income than normal. It is normal for the nominal GDP to rise while at the same time production is low. This comes along with the inflation of prices at the marketplace. In this case, we shall measure inflation rather than production in the nation. Increased investments can also be associated with the increase in production within the borders of a country. There are citizens who might get entitled to increasing their investments and this serves a positive aspect when it comes to the GDP of a country. However, this is only for the few citizens while the rest will have their incomes as constant. Taking these investments into consideration does not create any equity when it comes to the overall income distribution within the nation. Don't use plagiarised sources.Get your custom essay just from $11/page
In what ways does GDP understate income within a nation
The GDP of a nation can at times provide lower income values than the real income for its citizens for a given period. This is termed as understatement of the national income. What causes the income to be understated? One reason that might lead to this situation is the fact that GDP covers the exchange in the market but does not consider production that is exchanged outside the market. Take an instance where you have hired a person to plough your land. In this case, it is part of the GDP. However, if you were to plough the land yourself, it does not count as part of the GDP. In this case, a person might have earned more than what was determined in the calculations of the GDP hence can be termed as an understatement of his/her income.
Leisure and entertainment is not considered when it comes to determination of the GDP of a nation. This boils down to how we define leisure among ourselves. There are leisure and entertainment activities that we do and are aimed at providing us with additional income. In this sense, it can be seen that the level of income that will be developed by the nation statistics bureau will be less compared to the actual values at the ground level. a fall in the price levels in the market might imply that the customers will save a great deal. In this case, they will buy and save some little money in their actual income. Shift in demand affects the prices in the market a great deal. A product that receives few customers might be forced to get sold at a smaller price than normal for it to get market. A situation where the prices are low might mean that the income levels of the customers will be higher than the GDP-generated income values.
In what ways does using GDP to compare income between nations potentially provide an inaccurate comparison
One reason why we can term the GDP as an inaccurate comparison method is that it does not take into account the underground economy. The GDP relies on official data that is generated by computers. This can affect the real values sine the underground economy is very essential for any nation. This is due to the fact that the data from the underground is real and more accurate than the estimates that are often used. When we are comparing a country over time, the amount of time in hours worked to attain a certain level of income may be different from one nation to the next (Benford et al, 2016). There are workers who work longer than workers in another country despite them working within the same field. This difference, therefore, makes the comparison using GDP less reliable.
Price differences among countries is another issue when it comes to comparison of income for different nations. When the price of goods vary from one country to the next, the GDP will be affected a great deal. This is so because the purchasing power is affected greatly by the prices in the market. Recalculating the GDP in terms of the purchasing power would serve as a solution to the issue of price differences among nations. Inflation rates and the relative costs of living are termed as the determinants of the purchasing power. The other challenge that can be faced during comparison is the difficulty in accessing true economic values. Transport infrastructure and military values have posed a great challenge to access and hence the values used are just imaginary. This means that each country will have very different spending when it comes to these assets. Current conversion losses and hidden economies also render the comparison using GDP inaccurate.
In what ways does GDP provide a relatively shallow picture of income within a nation
The standards of living comprise all the elements that contribute towards the happiness of a person. The standards of living comprise several aspects, some of which cannot be bought or sold in the market. GDP per capita comprise a bit of the definition of standards of living of a nation. Migration activities that have been seen to prevail in the recent past have involved people moving from nations with a low GDP to nations that have a relatively higher GDP per capita (Schreiner & Woller, 2016). A shallow picture is however displayed when we take GDP into consideration in the sense that there are important things that it does not cover and are of great importance to the living standards of a person.
Leisure time is not covered as part of the GDP. leisure time involves all the hours that one is considered not working. Some nations regard the overtime hours as leisure hours. However, since overtime will not be considered in the calculation, it will affect the GDP a great deal. This can be simplified by pointing out that production is still in progress whether they are working hours or overtime hours. The GDP despite including the spending on healthcare, education and environmental protection, it does not indicate the actual levels of the same. Despite the cost of buying the equipment for the job, it does not consider whether the equipment were well used for the assigned job. It is in this case that we find it hard to follow up the spending that are set aside for the purpose of these actions within a nation.
Another reason why GDP is considered to bring about a shallow picture is the fact that it does not account for the goods that are exchanged outside the market. This means that there are sectors within the economy that will not be put into consideration despite them being part of the economy. GDP does not prove anything when it comes to equality within the society. It is only an average. We can say that it is an assumed value that is tied onto an individual (Nolan et al, 2018). This means that there are times when an individual’s income will understated and times when it will be overstated. It also does not define the quality of services or goods that a citizen ought to purchase. If it was bread that was purchased, the GDP calculation will not care whether it was white or brown bread. Technology and products available are also not considerations of the GDP. the GDP aims at generalizing everything may it be bad or good technology without considering the ways it was used.
Guatemala’s sources of growth in the relatively recent past and what are the challenges for the future.
Guatemala’s economy can be termed as less developed as it is dependent on traditional crops including sugar, coffee, and bananas. It is also considered the most populous country of Central America. The per capita income of Guatemala has been estimated to be a third of Brazil’s. Following 36 years if civil war, which served as the main development obstacle, Guatemala signed the 1996 peace accords which eased the situation. Important reforms have since then taken place which are aimed at economic stabilization. The Central American Free Trade Agreement (CAFTA) which was arrived at on 1st July 2006 increased the export sector of the economy. A great win for the Guatemala economy (Irshad, 2017). However, the poverty levels are still on the rise in the nation with over 12% of the population living in extreme poor conditions. Guatemala enjoys a huge amount of remittance from the United States due to their expatriate nature which was estimated to be $19.1 billion in 1990.
The private sector has been seen to be dominating the economy of Guatemala. It generates over 85% of the total GDP for the country. Food processing and light assembly make up most of the country’s manufacturing sector which are exported to U.S and for domestic use. The private sector has been aiding the country in generation of income as great deal as it improves the exports sector. Tourism has been another booming part of the Guatemala economy. Exportation of flowers, vegetables, and fruits have also been on the rise in the recent past. However, a large export share is still dominated by the traditional exports of sugar, coffee and bananas. There has been a great fluctuation in the number of exports over the past two decades. The export percentage was 21% in 1990 which dropped to 20% by 2000 which rose to 26% in 2010. It can be seen that the level of exports has been changing with time and it is hard to predict what the next decade will look like. On the contrary, the level of imports has increased exponentially.
Poor women and unpaid work is a challenge that is thriving within the economy of Guatemala. As of 2010, 31% of the females in Guatemala were illiterate. In this population, the higher percentage are women. The poor women in these rural areas are associated with performing domestic chores, maintaining the household, and care work for their men. It has been seen that women perform similar tasks to men but their pay is less or no pay at times. The unpaid household work has been associated with large households and the unavailability of the paid works. Women living in the rural Guatemala are on the verge of poverty as compared to those living in the urban areas. This is a major challenge for the economy as it tries to balance the economic status of people living in urban and rural areas.
Women are at the disadvantage of having a small pay as compared to men. They have been seen to be earning a 97% of the men’s pay despite them having the same levels of education. This is a challenge for Guatemala as the labor force will get limited with time. Lack of motivation will lead to poor production and consequently poor quality services delivered (Feldstein, 2017). Gender inequality seems to pose a great challenge for the economy of Guatemala for a great period of time. With women getting discriminated, it can be seen that there will come a time when this will lead to national crisis. Child labor is another challenge that is prevalent in the country. Lack of schools has turned children to hustlers who get involved in hard economic activities at a tender age. Children, approximately 14%, aged between 7 to 14 work, most of them serving in the agricultural sector. With uneducated children, the future can be termed as dark for the nation in general.
Using the Gini Coefficient, describe the equity of the distribution of income within Guatemala
A Gini index can be said to be applied in measuring the extent of the distribution of income among the individuals or households comprised in an economy deviates from a perfect equal distribution. This implies that there is a point of reference from which the graph should deviate. The deviation is in terms of the distribution of income, which includes consumption expenditure at times, of an individual. A Lorenz curve can be used perfectly in the derivation of the Gini index. It plots an accumulated percentage of the total income against the total recipients. The poorest individuals act as the first ones in the curve. The Gini index is defined by the area between the two curves, the curve and the line of reference. Perfect equality is indicated by 0 index while 100 index implies perfect inequality. The Guatemala Gini index is shown in Figure 1 below:
Figure 1: Guatemala Gini Index
By most standards, the poverty rate in Guatemala is high. The country hosts 16.5 million people, hence the most populous in Central America. Income inequality is experienced at a great extent in Guatemala. According to a research that was performed by the Union Bank, Switzerland, 56% of the Guatemala economy is owned by 260 individuals (Hellin et al, 2017). It can be seen that there are many people who have little or no share when it comes to the economy of Guatemala. The most essential source of wealth in Guatemala is agriculture which accounts for 20% of the GDP. rapid population growth has been a challenge to the distribution of income in Guatemala. There exists a very small middle class persons in Guatemala as the people here are either rich or poor. This implies that it is very difficult to narrow the line between the rich and the poor.
References
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Hellin, J., Cox, R., & López-Ridaura, S. (2017). Maize diversity, market access, and poverty reduction in the Western Highlands of Guatemala. Mountain Research and Development, 37(2), 188-197.
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Schreiner, M., Woller, G., & Woller, G. (2016). Simple Poverty Scorecard Poverty-Assessment Tool: Guatemala. SimplePovertyScorecard. com/GTM_2006_ENG. pdf, retrieved, 12.