Help with GDP please!!?

Question

hi guys, im doing an economics assignment and i have just these two little questions left.
b. What cautions must be applied when comparing a nation's GDP from one year to another?
c. Can we use GDP as a reliable economic predictor? Why or why not?

i've searched my whole text book and can't find them. If anyone knows please tell me.

Thanks a lot to anyone who answers! :)

Answer 1

b. The comparison should be done in terms of GDP/capita in purchasing power parity (PPP). PPP coefficients use the long-term equilibrium exchange rate of two currencies to equalize their purchasing power.
c. GDP should be used with cautious because it is not the only measure of development.

Answer 2

As the previous answer noted, GDP depends heavily on the process used to normalize the results (purchasing power parity, GDP per capita, etc.) but there are other weaknesses:

1. Most GDP numbers come from governments and most governments have an interest in seeing the data go one way or the other and so fudge the data.

2. Inflation data is always suspect. How do you compare a computer today with a computer of 10 years ago? Ditto for population estimates and census data. (The Republicans refused to allow the U.S. Census Bureau to use modern data analysis methods because that would eliminate the undercount of inner-city residents who tend to vote Democratic.)
http://www.usmayors.org/uscm/wash_update/census/census_introduction.htm

3. Much of the economy (according to the best estimates, 16% in the case of Italy, higher in the case of some third world countries) doesn't appear in any government records. Some of this is the underground economy, some is pure corruption, etc.
http://www.time.com/time/magazine/article/0,9171,915307,00.html
http://query.nytimes.com/gst/fullpage.html?res=9903E6DB1230F930A35754C0A961958260

4. To what end are you comparing GDP numbers over time? It is almost never the case that GDP is really what you want to compare. (Though the temptation to use GDP when that's all you have can be hard to avoid.)

As for economic predicition, GDP is essentially useless. It is the components of the GDP that matter: how much goes into private consumption, how much goes into investment, how much goes into the military, etc.

For example, each dollar spent has a multiplier effect: dollars spent on food go to the grocery store which pays its people, etc.

But different spending patterns have different multiplier effects. Money saved in banks has a much higher multiplier than money put under the mattress for safe keeping; money spent on education has a higher multiplier effect than money spent by the government on the military (the latter is almost the lowest)

So knowing where the domestic production going is critical to any sort of economic prediction.

As always, wikipedia is your friend:

http://en.wikipedia.org/wiki/Gross_domestic_product
http://en.wikipedia.org/wiki/Multiplier_(economics)