Is GDP a good enough indicator of understanding the economy? How GDP contributes to growth and development of a nation? What is GDP? The gross domestic product (GDP) is an aggregate measure of total economic production for a country and represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (adding exports and subtracting imports). Gross domestic product, adjusted for inflation, also known as "real GDP", can tell economists whether an economy is growing or contracting from year to year or from quarter to quarter, a key determinant in deciphering whether the economy is expanding or in a recession.
However there are some limitations which are, it is mostly categorised using nations GDP this can be done by looking at GDP per capita or GDP of nation as a whole, this could become hard to scale. For
This gives us a clear comparison and to let us see who has the better GDP. GNP statistics reveal huge differences in wealth between nations. So this can be considered of worth. Reasons it can be considered of worth is that GGNP statistics indicate changes in a countries overall production and the direction of its economy, it can also measure how an economy is functioning, this is very useful when looking at wealth as you would be able to see which countries are thriving and the best to trade with, and which ones are not doing so good. Other reasons statistics are of meaning and worth are because it helps us to identify that the poorest countries actually have a declining GNP.
Following graph depicts the effect of inflation on cost One of the method firms use for adjusting for inflation is by deflating nominal cost data using an implicit price deflator. Usually the deflator value is obtained from Survey of current business for a period question. Nominal cost is divided by deflator to arrive at the real cost. Using real cost will help up the firm to come up with good a short run cost estimate. Since short run involves a smaller period the effect of inflation on input prices is ignored.
Banks have a reserve requirement, which is set by the fed. A reserve requirement is the minimum percentage of a bank’s total reserves that they are required to keep, for security reasons. (Schiller) The fed can change the reserve requirement to allow a bank to loan more/less money, which is used to control the economy. Many critics use this to determine that annual deficit spending has a negative impact on the economic stability of our country. The fed has to set a lower reserve requirement, which allows banks to loan out more money, which generates more interest, which could lead to periods of inflation and could have worse consequences if the government does not react quickly enough.
In contrast, if there is not active market, market value accounting requires the use of estimation subject to uncertain assumptions, personal judgment, and subjective information about future values, such as discount rates and allowance for doubtful accounts. FASB has broadened the framework and disclosure practices to increase the reliability of market value accounting. However market value accounting is still emphasize the role of managerial judgment in the valuation process. Besides, market value accounting offers management the opportunity to manipulate the bottom line. So it’s less reliable than historical costs.
But the impact may not be very significant even if an average rate is taken. The effort required to estimate the inflation rate for each element may not justify the accuracy that may be obtained. If the understanding in the project is that sales and costs may increase by different values very different from the average inflation, then we may need to consider the inflation separately. Question 9 NPV $178,337 IRR 21.6% MIRR 17.6% ARR 28.5% Payback 2.56 years (The figures are from the attached file with Cell C38 = 4% and C39 =2% – sales inflation taken at 4% and cost inflation at 2%) Question 10 a. The NPV would decrease since the costs will be higher and the new NPV is $98,762 NPV $98,762 IRR 17.5% MIRR 15.2% ARR 22.2% Payback 2.76 years (The
The opposite occurs for a balance of payments surplus. However, the extent to which this occurs depends on the price elasticity of demand for exports and imports on the Marshall Lerner Condition. This condition states that devaluation (a fall in the value of the currency) will lead to an improvement on the current balance will be seen if the combined elasticities of demand for exports and imports are greater than 1. The size of any J-curve affect in the short run will also affect this extent. The J-curve effect is a short term
For instances, company can choose cost model or revaluation model for property, plant, and equipment. The inventory must be measured at the lower of cost or net realizable value. In addition, according to Mautz (1973), it stated that if who rely on the financial report that measured on historical cost to make decision, found that the information is not useful, then the accounting method will change since it have been made. However, during the times of rising prices, the historical cost accounting has limitations. This is because according to Elliot (1986), it stated that historical cost assumes money holds a constant purchasing power.