GDP or the Gross Domestic Product is the value of total goods and services produced by an economy within its geographic boundary within a specific period of time (Konchitchki and Patatoukas 2014). GDP is measured through three methods, which are Output method, Expenditure method and the Income method (Munda 2015). Output method measures the market value of the total goods and services produced in an economy within its geographical border (Dobija 2015). On the other hand total expenditure measures the total expenditure incurred by the economy on the goods and services within the geographical boundary of the economy. Income method measures the total income earned by the labors and capital within the economy (Trinh 2017). GDP is one of the basic indicator of the human development index, however, there are various flaws in the measurement too.
- GDP does not incorporate the leisure time into its analysis that constraints the researcher to measure the well-being level of the economy
- Secondly, GDP fails to depict the wealth distribution of the nation. If the wealth distribution is biased, then it cannot be reflected through the GDP and fails miserably to calculate the HDI of the economy.
Source: (Created by Author)
Figure 1 depicts the HDI trend of a developed nation and of a developing nation. In this case, Australia has been chosen as the developed nation and India has been chosen as the developing nation. Considering the trend of the HDI of both the nation, it can be stated that Australia is well ahead compared to India, in terms of HDI index. During 1990 to 2000, India has faced a sharp rise in its HDI, whereas Australia has faced slower change in the HDI during the same period. Post 2010, both the nation has been facing slow rise in the HDI, however the rate of change of HDI for India is higher than Australia. With 0.900 HDI, Australian people lives a better life compared to the Indian, whereas the Indian people lives a fair life, though the development in the country is not that high as of Australia (Çilingirtürk and Koçak 2017)
Criterion used by the firms to discuss the investment expenditure varies depending upon the objective of the investment opportunity in front of the firm. In the case of the investment expenditure that enhance the safety, reduce pollution and related to maintenance while complying with the regulation gets approved without quantitative evaluation. However, discretionary investment expenditure is subject to evolution whose magnitude depend upon the size of the investment, manager’s attitude towards risk and perceived riskiness. Considering this, it can be stated that, when it comes to the criterion used by the firm while undertaking investment expenditure is Discounted Cash Flow and Payback period (Boardman et al. 2017).
Discounted cash flow is the general method recommended by the finance theory in order to evaluate the investment decisionbased on the Net Present Value (NPV) (Damodaran 2016). According to this, investment expenditure should be framed considering the sum of all Cash Flows sourced from the investment utilizing the chosen discount rate by the firm. In general if the NPV is positive, then it is good to invest in the project.
Next to this, there is payback period, where the firm evaluate the investment decision using the payback period, which is basically the number of the year, within which capital outlay to be returned through the generated cash flow of the project (Abor 2017).
In addition to this, companies take Gross fixed Capital Formation as another method of investment expenditure. Utilizing the Production Possibility Frontier (PPF) it determines the investment expenditure.
Source: (Created by Author)
Considering the diagram it can be seen that capital formation has been higher in the case of developing nation (India) within the selected time frame, that determine the higher rate of capital addition by the state compared to the developed nation Australia.
GDP growth is the indicator of the growth rate of an economy. Rising growth rate determines that the output of the economy has been enhanced or the income or the expenditure of the factor of production has enhanced (Grant 2016). Higher growth rate means better standard of living due to better employment scope as well as the enhanced scope of achieving sustainability.
International trade is one of the things that has been under rigorous research since decade due to its vast scope, magnitude of operation and ability to alter the economic performance of the nation. Initially trade was done among the trade participating nations depending upon the specialization, and the idea of product specialization was brought to the world by the then great economist Adam Smith (Jones and Kierzkowski 2018). He argued in favor of international trade, which is able to aid the economic condition of the trade participating nation through providing scope to export to the foreign nation and earn foreign reserve. In addition to this, it has also been argued that the international trade will provide scope to try out variety of options of goods and services to both the participatingnation that will aid to enhance the HDI of the different economies too.
However, over the time, it has been observed that specialization in the production of is not only the thing that enables the country to indulge themselves into trade. As it can be seen from the Leontief paradox, though the US is acknowledge as one of the capital intensive food producer due to its abundance in capital, it used to export labor intensive product during the selected time frame (Feenstra 2015). On the other hand China being a developing nations, exports large amount of capital intensive goods (Hoefele, Schmidt and Yu 2016). Thus, countries specialization in production is not only the means of international trade, in addition to this, comparative advantage in production is another factor that determines the trade flow.
Yes, most of the countries engaged in trade benefit from it; however comparing the benefit from the developed and developing nations’ perspective, it can be seen that the most of the benefit from the trade has been enjoyed by the developed nations till no, due to their abundance of factor of production and capital (Leamer and Stern 2017). According to the Viner (2016),biased trade acts has facilitated the developed nation with undue advantage through trade that has aided their economies to grow at a faster rate.
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Çilingirtürk, A.M. and Koçak, H., 2017. Çilingirtürk, A.M. and Koçak Human Development Index (HDI) Rank-Order Variability. Social Indicators Research, pp.1-24.
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Munda, G., 2015. Beyond GDP: An overview of measurement issues in redefining ‘wealth’. Journal of Economic Surveys, 29(3), pp.403-422.
Trinh, T.H., 2017. A primer on GDP and economic growth. International Journal of Economic Research, 14(5), pp.13-24.
Viner, J., 2016. Studies in the theory of international trade. Routledge.Order Now