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GDP vs NDP, Globalization, Specialization and Economics

Q.3) Economists normally talk about GDP even though they know that NDP is a better measure of economic activity. Why?

Q.2) What effect has globalization had on the ability of firms to specialize? How has this affected the competitive process?

Q.1) What is economics? What are the resources that are available to you in your efforts to understand current economic conditions?

Solution Preview

Attached a supporting article discussing two economic indicators.

Q.3) Economists normally talk about GDP even though they know that NDP is a better measure of economic activity. Why?

GNP is the total market value of all the goods and services produced by a nation during a specified period.
The Net Domestic Product (NDP) equals the Gross Domestic Product (GDP) minus depreciation on a country's Capital (economics) goods. This is an estimate of how much the country has to spend to maintain the current GDP. If the country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and NDP indicates increasing obsolescence of capital goods, while a narrowing gap would mean that the condition of capital stock in the country is improving (Spant, 2003).

Even though some (not all, though) would argue that NDP is a better measure and indicator of activity, the GDP is often used because other economists do not agree. Since there is a large amount of work that goes into producing statistics on economic growth, it is understandable that those who produce them are prone to defend their quality and to argue that alternative measures only marginally alter the overall picture, like the continued use of the GDP. That may be true in many cases, but not always. We must keep in mind that statistics are often used to compare countries or periods of time, e.g. the acceleration or deceleration of economic growth between two dates. With that type of comparison, different measurement techniques can have a decisive influence on results and conclusions, and may even affect policy recommendations (Spant, 2003).

EXAMPLE: ARGUMENT FOR USE OF NDP
One of the principal criticisms of the growth measures that currently predominate has to do with the almost total fixation on Gross Domestic Product (GDP). From this view, there should be much less emphasis on GDP as the main yard- stick of economic growth, and a much greater emphasis on Net Domestic Product (NDP). The most basic measure of economic output is of course GDP, which includes all expenditures for investment, regardless of whether they are used to add to the capital stock, or simply to replace worn out or obsolete equipment and software. The portion of investment spending that is used to replace worn out and obsolete equipment ? depreciation ? while essential for maintaining the level of output, does not increase the ...

Solution Summary

Economists normally talk about GDP even though they know that NDP is a better measure of economic activity. This solution explains some of the explanations for this. It also discusses the effect that globalization has had on the ability of firms to specialize and how this affects the competitive process. Finally, it explains what is meant by economics and the types of resources that are available to a person in an effort to understand current economic conditions. Supplemented with an article comparing the use of the GDP and NDP.

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