At the start of 2023, alarms were blaring over global trade disputes, geopolitical tensions and the potential for resurgent inflation. But despite these headwinds, the world economy has continued to defy expectations by retaining robust growth. This is set to continue this year – though growth is projected to slow down in China and the U.S, the two largest economies in the world.
GDP emphasizes material output without considering overall well-being. For example, a nation’s rapid GDP growth may come at the cost of environmental degradation and an increase in income disparity among its citizens. It also fails to account for unrecorded economic activity such as under-the-table work, underground market transactions and unpaid volunteerism. It also ignores quality improvements and new products, focusing only on their monetary value rather than their utility.
In addition, GDP does not include all private or public spending. Specifically, the components C (capital expenditures), I (investment) and G (government spending) exclude investments that are used to produce other goods or services in a country during an accounting year. This means that a company that buys auto parts to manufacture cars and then sells them is counting these auto parts towards its GDP, even though they will be used again to produce future cars and thus not counted in GDP again. Similarly, investment in weapons to fight wars counts as GDP but doesn’t count as investments for peaceful purposes.
Finally, GDP figures are always reported in the country’s currency. This makes it difficult to compare countries using the same measurement, since different currencies will differ in value in terms of purchasing power parity (PPP). To address this issue, GDP is converted into U.S. dollars either by using market exchange rates or by estimating PPP exchange rates.
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